Higher incidence of debt, but not heavily indebted

Data show percentage of indebted households has risen, but so has debt-to-asset ratio, implying a higher capacity to service debt

According to a National Sample Survey Organisation (NSSO) survey on household debt and asset ownership in India, the incidence of household indebtedness in both rural and urban areas has risen over the past decade. The percentage of indebted households in rural areas has risen from 26.5% in 2002 to 31.4% in 2012, while that in urban areas has increased from 17.8% to 22.4% over this period. This sharp rise in the level of indebtedness can be either construed as a sign of distress — of a larger number of poor households that are borrowing to finance their expenditure — or a sign of greater availability of credit. 

But rather than viewing these numbers in isolation, it might be better to find out the degree of indebtedness relative to households’ capacity to pay back. If households’ loans exceed their ability to pay back, one could argue households are heavily indebted. With the survey also collecting information on the asset ownership of households, it is possible to analyse the ability of households to cover their debts through asset ownership.

The report provides decile-wise estimates of the debt-to-equity ratio, which is the average amount of debt outstanding held by households on a particular date as a percentage of the average value of assets owned by them. This ratio reflects the burden of debt on any particular group of households.

Data show the debt-asset ratio at an all-India level was 3.7% for the urban areas and 3.23% for rural parts, implying households could comfortably service their loans. The higher ratio at the lower deciles implies poorer households borrow a higher amount as a percentage of their assets and, so, have a relatively low capacity to fund liabilities. 

In rural areas, the debt-to-asset ratio for the lowest decile, is 39%, while that for the urban areas is a staggering 1,920%. Notwithstanding issues of sample size, a possible explanation could be that the poorest in rural areas have small agricultural landholdings; that will not be the case in urban areas. Thus, while the average amount of debt in urban areas is lower in the first decile, the average value of assets of urban households is a mere 1% of rural households. This implies the poorest of the poor in urban areas are more indebted than their rural counterparts.

Average value of assets, average amount of debt and debt-asset ratio by household asset holding class: All-India
 

	Rural			Urban
Decile class of household asset holding	Average Value of Assets	Average amount of debt	Debt-asset ratio (%)	Average Value of Assets	Average amount of debt	Debt-asset ratio (%)
1	25,071	9,705	38.71	291	5,587	1920.28
2	89,593	8,819	9.84	9,565	11,934	124.77
3	151,460	13,811	9.12	67,428	20,075	29.77
4	227,415	15,673	6.89	224,760	28,430	12.65
5	325,385	18,800	5.78	447,719	29,915	6.68
6	454,192	23,441	5.16	777,591	36,751	4.73
7	635,506	28,770	4.53	1,248,347	55,519	4.45
8	922,870	37,662	4.08	2,001,390	91,069	4.55
9	1,548,889	56,658	3.66	3,513,327	168,470	4.8
10	5,689,385	111,884	1.97	14,559,978	398,457	2.74
Total	1,006,985	32522	3.23	2,285,135	84,625	3.7

Source: NSSO 70^th round, Key indicators of debt and investment in India