The dependency of people on the non-institutional credit agencies has declined over the last six years between 2012 to 2018 even though the household debt increased by 1.5 times for the same period, according to a study by the economists of the State Bank of India. Since early last year, the Covid-19 pandemic has also fueled the spike in household debt. According to the SBI data, as reported by The Times of India, the dependency on non-institutional credit agencies reduced significantly from 44% in 2012 to 34% in 2018.
During the same period the household debt in rural areas increased by 84% and in urban areas by 42%, the SBI data showed.
The household debt to GDP ratio grew sharply during the Covid-19 pandemic year, by an estimated 37.3% in 2020-21 against 32.5% in the previous year, as per the report.
The trend, according to the SBI’s economists, suggests a growing formalisation of the Indian economy, since the reliance on non-institutional credit has shown a constant decline. This decline has remained significant in Gujarat, Haryana, Bihar, West Bengal and Rajasthan, the TOI report added citing the SBI data.
The SBI study attributes two reasons for this trend— the rise in the issuance of Kisan Credit Cards (KCC) and the farm loan waiver.
Recommendations of SBI economists
The SBI’s economists suggest that more reforms in agriculture, which supports nearly 44% of India’s population and contributes 16% of the country’s GDP, could go a long way in further formalising India’s economy. The report stated these much required measures are ‘extremely important’. At the moment the agriculture sector was growing at a measly rate of 3-4%, which was found insufficient.
“It has become important in the context of the spate of recent reforms that include permitting private wholesale markets, contract farming, direct purchase from farmers and land leasing across states both under the earlier state-level Acts, and now under the Central Acts. As per the norms of asset classification for agriculture advances, in case of an agriculture cash credit account a farmer has to repay the entire outstanding (principal along with interest) to seek fresh loans from the banks unlike other segments of cash credit business where if the borrower has cleared interest payments, he or she would be eligible for enhancement or renewal,” the report mentioned as quoted by the TOI.
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