Even before the pandemic broke out, the average amount of debt among rural households increased by a whopping 84%, while that of urban households increased by 42% during the six-year period 2012-2018.
However, the ‘good news’ is that the debt portion of non-institutional credit Agencies declined significantly to 34 percent in 2018 from 44 percent in 2012, a report by economists at the State Bank of India (SBI) showed.
Formalization of the economy
With the proportion of non-institutional credit bureaus in decline, especially in rural areas of India, there are signs of increasing formalization of the economy.
A significant decline in these sources of credit has been observed in Bihar, West Bengal, Rajasthan, Haryana and Gujarat.
One of the main reasons for this decrease can be attributed to the increase in the number of Kisan credit card (KCC) issues, especially in Haryana and Rajasthan, which registered an average increase of 9%.
In the last 7 years, the number of KCC cards has multiplied by five, according to the report.
In addition, the agricultural loan exemption has been another important reason for reducing the proportion of non-institutional credit bureaus.
Source: SBI Research
‘Agricultural reforms can help formalization’
SBI economists believe that recent reforms in agriculture could further help formalize the economy.
Agriculture is one of the fundamental sectors of the economy and almost 44% of the population depends on it. The sector has a 16 percent share in the growth of the economy.
However, it is currently growing only in the range of 3% to 4%.
Therefore, the report says that focusing on the sector has become extremely important to ensure its development.
In light of this, the report stated: “It has become important in the context of the spate of recent reforms including allowing private wholesale markets, contract farming, direct purchase from farmers, and land leasing in all states, both under the previous state- Level Acts, and now under the Core Acts. ”
In addition, he suggested that cash credit for agriculture be on par with other segments.
“According to the asset classification rules for agricultural advances, in the case of an agricultural cash credit account, a farmer has to repay the entire outstanding debt (principal and interest) to seek new loans from banks, unlike other segments of the cash credit business, where if the borrower has settled interest payments, they would be eligible for an upgrade / renewal, “according to the report.
Post-Covid household debt
The family debt / GDP ratio skyrocketed during the pandemic.
The report estimates that it has risen dramatically to 37.3 percent in 2020-21 compared to 32.5 percent in the same period a year earlier.
Although he expects debt as a percentage of GDP to have declined by 34 percent in the first quarter of the 2021-22 financial year, SBI economists believe it has risen in absolute terms.
“In absolute numbers, household debt has risen to Rs 75 million lakh in the first quarter of fiscal year 22 from Rs 73.59 million in fiscal year 21,” he said.
They also project that household debt in both rural and urban areas could have doubled in 2021 compared to 2018.
Increase in debt-to-asset ratio
The debt-to-assets ratio, which is an indicator of household indebtedness, increased to 3.8 in 2018 from 3.2 in 2012 for rural households. For urban households, the ratio has increased from 3.7 to 4.4.
Kerala, Madhya Pradesh and Punjab were the three states that experienced a deterioration of at least 100 bps (basis points) in the debt asset ratio during the six-year period ending in 2018, according to the report.