Household debt fears are exaggerated

The 77th round of the National Sample Survey which includes an assessment of indebtedness of households across the country contains crucial pointers to banks and financial intermediaries about the level of debt that households owe in relation to the assets that 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 resultant demand slowdown, income generation and private consumption has to be charged up to serve as one of the key engines for our economic growth machine to start revving again. As we speak, we are at national economic output levels which are below what we had at the end of March, 2019. So there is catching up of ground lost to be done before we can confidently claim that our onward march to the top 4 or 5 economies in the world is a sustainable, secular trend. It is worth recalling that we were dubbed as part of a “Fragile Five” nearly a decade ago.

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

The NSS says that the ratio of indebtedness to assets of a rural household is 3.8 per cent whereas it is 4.4 per cent in the case of an urban household. In simple terms this means that for every ₹100 of assets that they hold (mostly physical assets), the amount that they owe is less than ₹5.

The indebtedness includes credit from formal and informal sources.

If we were dealing with corporate entities, this ratio could have been easily called as “leverage”. But as the discussion veers round “households”, it is admitted that it would be facile to reduce the data to such a terminology. A “household” for the purpose of such national surveys is reckoned as a family or a group of people who are dependent on a common kitchen.

What the numbers say

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

Or is it that, on the contrary, such overblown concerns and the consequent lack of formal credit are holding incomes down, liquidity tight and conditions unfavourable for these households to realise their full potential for economic growth? Are we becoming too cautious about debt when with a little bit of reimagining of our idea of debt, higher levels of financing could indeed be sustainable and provide the “liquid” capital for these households to move into the next orbit of their growth trajectory?

Evidence from the developed countries indicates very strongly that this is not just contrapuntal theory and indeed our household debt is way below the levels in most other countries.

Data from the IMF shows that right from 1995 onwards and beyond 2016 too, the indebtedness to assets ratio for households has remained above 5 per cent initially and beyond 10 per cent since 2015 in the OECD countries.

It is reasonable to posit therefore that there is indeed a case for paving the way for “higher” indebtedness, not “lower” indebtedness for Indian households especially in the rural areas. The only question to be dealt with here is: can we be comfortable with a certain level of continued indebtedness for households instead of being obsessed with reduction in these levels (repayments) at least till families/households cross a threshold of income which will put them on a par with the relatively better-off sections?

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

It must also be remembered that the Indian individual credit registry system is sufficiently evolved now to capture loans from the entire formal system (commercial banks, cooperative banks and the RRBs) so that interest-servicing capacity is possible to be estimated reasonably accurately.

Pushing micro credit

This approach which requires a re-engineering of the first principles of micro credit — whereby we accept that let indebtedness (as a proxy for capital) prevail as long as interest (cost of capital) coverage is assured — can potentially lead to an explosion in credit absorption by rural households with concomitant benefits for the virtuous cycle of surplus income generation, consumption, demand, private investment and employment, to grow.

The idea is more relevant now than before. It is undeniable that while interest rate “transmission” has been achieved, “liquidity transmission” has got stuck somewhere, resulting in a systemic overhang and it not percolating down. Under these circumstances, if corroboration is required that the average household (particularly rural) is asset rich (solvent) but cash poor (illiquid) that is provided by the latest NSS exercise.

In a recent address, RBI Deputy Governor M Rajeswar Rao evocatively pitched for “Empowering a billion dreams” . He reiterated that microfinance “enables the poor and low-income households to increase their income levels, improve their overall standards of living and thereby come out of poverty. It also has the potential to become a vehicle to achieve national policies that target poverty reduction”.

This well-meaning theme can become a reality soon enough, if only our conventional notion about “household indebtedness” is subjected to a hard second look and interest-coverage instead of debt service-coverage is accepted as the basis for small-ticket lending.

The writer is a top public sector bank executive. The views are personal

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