Household debt fears are exaggerated


The 77th cycle of the National Sample Survey, which includes an assessment of household indebtedness across the country, contains crucial insights to banks and financial intermediaries on the level of household indebtedness relative to the assets they have. ‘they own.

The number of households surveyed is 69,000 in rural areas and 47,000 in urban areas.

This ratio is important because in the wake of Covid and the resulting slowdown in demand, income generation and private consumption must be recharged to serve as a key driver for our economic growth machine to restart. As we speak, we are at lower national economic production levels than we had at the end of March 2019. So there is still some catching up to be done before we can confidently state that our progress to the top is 4 or 5 economies in the world is a lasting and secular trend. It should be remembered that we were dubbed as part of a ‘Fragile Five’ almost a decade ago.

There is also the eternal five-fold national income gap between us and the only other country in the world with a similar population – China – that we must close, if our per capita income is to become comparable.

The NSS indicates that the debt to assets ratio of a rural household is 3.8% while it is 4.4% in the case of an urban household. Simply put, this means that for every 100 of assets they own (mostly physical assets), the amount they owe is less than $ 5.

Debt includes credit from formal and informal sources.

If they were legal entities, this ratio could easily have been called “leverage”. But since the discussion revolves around “households”, it is recognized that it would be easy to reduce the data to such terminology. For the purposes of such national surveys, a “household” is considered to be a family or group of people dependent on a common kitchen.

What the numbers say

What do these two numbers indicate? What are the corresponding figures for developed countries? Is indebtedness high for Indian households, especially rural as is generally believed?

Or, on the contrary, are these exaggerated worries and the resulting lack of formal credit hampering incomes, tight liquidity and unfavorable conditions for these households to realize their full potential for economic growth? Are we becoming overly cautious about debt when with a little re-imagining of our idea of ​​debt, higher levels of financing might indeed be sustainable and provide ‘liquid’ capital for these households to move on. in the next orbit of their growth trajectory?

Evidence from developed countries makes it very clear that this is not just a contrapuntal theory and that in fact our household debt is much lower than the levels of most other countries.

IMF data shows that from 1995 and beyond 2016 as well, the household debt ratio has remained above 5% initially and above 10% since 2015 in OECD countries.

It is therefore reasonable to postulate that there is good reason to pave the way for “higher” and not “lower” indebtedness for Indian households, especially in rural areas. The only question to be addressed here is: can one be comfortable with a certain level of continuing household debt instead of obsessing over reducing those levels (repayments) at least until families / households cross an income threshold that will put them on an equal footing with the relatively better-off sections?

The construction of this thesis for a higher level of indebtedness will be strengthened if we were to shift the lending lens from debt servicing to interest servicing as a tool for the continued support of financial capital to the disadvantaged.

It should also be remembered that India’s individual credit registration system is now sufficiently evolved to capture loans from the entire formal system (commercial banks, cooperative banks, and RRBs) so that interest servicing capacity can be achieved. be estimated with reasonable precision.

Push micro credit

This approach, which requires an overhaul of the first principles of microcredit – according to which we agree to let debt (as a proxy for capital) prevail as long as interest coverage (cost of capital) is ensured – can potentially lead to an explosion of loans. uptake of credit by rural households with concomitant benefits so that the virtuous circle of excess income generation, consumption, demand, private investment and employment develops.

The idea is more relevant now than before. It is undeniable that while the “pass-through” of interest rates has been achieved, the “pass-through” of liquidity has gotten stuck somewhere, causing a systemic surplus and not seeping down. Under these circumstances, if corroboration is required, the average household (especially rural) is rich in assets (solvent) but poor in cash (illiquid), which is provided by the last NSS exercise.

In a recent speech, RBI Deputy Governor Mr. Rajeswar Rao evocatively pleaded for “Empowering a Billion Dreams”. He reiterated that microfinance “enables poor and low-income households to increase their income levels, improve their overall standard of living and thereby lift themselves out of poverty. It also has the potential to become a vehicle for implementing national policies that target poverty reduction ”.

This well-intentioned theme can become a reality soon enough, if only our conventional notion of “household debt” is given careful consideration and interest coverage instead of debt service coverage is accepted as the basis. for low cost loans.

The author is a senior executive of a public sector bank. Views are personal

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