Introduction

India has experienced a huge and persistent economic impact due to the COVID-19 pandemic. Unexpected demand and supply shocks have resulted in significant reductions in employment and income for many Indian households (HH). Kerala is no exception to this. Families are in dire financial straits. There is a sharp decline in most household financial assets and an increased reliance on borrowing (RBI, 2021). In fact, household credit and its accumulation (i.e., debt) can play a mitigating role in such situations. It allows people to smooth their spending over time, thereby greasing the wheels of the economy. Therefore, borrowing is highly essential, and debt per se is not bad.

Notably, India survived the 2008 crisis on the back of a vibrant state-owned banking sector. In particular, the lending strategy of the banks was judged appropriate. 12 years later, when the pandemic hit the economy hard, consumers could have expected a similar policy intervention. Indeed, sufficient credit growth has the potential to return the economy to pre-pandemic levels. Progress in terms of financial inclusion, particularly through formalization, is a long-term priority for the banking sector as well. Therefore, it is essential to examine whether banks and other financial institutions have been successful in generating credit during the pandemic. Were they effective in implementing the same lending strategies adopted during the 2008 crisis? Is credit growth sufficient to offset this one-off shock? Or has it gone astray?

In India, household debt has been rising long before the pandemic, especially after the 2008 crisis. While some studies reported a recent increase in household debt due to the pandemic (SBI, 2021), some others observed that credit growth was insufficient during the pandemic, primarily due to the higher risk aversion by banks (Dev and Sengupta, 2020). If households do not have adequate access to credit markets during the pandemic, the resulting reduction in household spending could negatively impact the state's economic recovery. Moreover, that credit access and household borrowing reliance has not been uniform across states in India during the pandemic. They differ in terms of factors including motives, availability of credit, rural-urban differences, and socio-economic conditions. According to the All-India Debt and Investment Survey 2019, Kerala topped the list of credit market participants even before the pandemic. It is therefore safe to assert that better access to credit is imperative for the state.

This study examines household indebtedness in Kerala, relative to other high-income and low-income states, since the onset of the Covid-19 pandemic. Data on all-India averages from CMIE's Consumer Pyramid Household Survey (CPHS) is used. In addition, it examines whether the banking sector is withdrawing from its core business of lending to people, especially during time of the crisis. In terms of the latter, how was the state able to maintain its pre-pandemic level of borrowing? What are the key drivers and who are its beneficiaries?

The rest of the chapter is structured as follows. Section 2 explains the pattern of household borrowing during the pandemic. Section 3 presents the main sources of household credit. Section 4 discusses the drivers of household debt. The final section concludes the study.

Pattern of household borrowing during the pandemic

Changes in the level of borrowing dependency and its behavior at the peak of the crisis can be understood by examining trends in household loans. It indicates credit growth or the lack of credit access during the pandemic. Table 1 shows a comparative picture of the average borrowing dependency of a household in Kerala with other high-income states, low-income states and all-India level. In particular, it highlights the wave-wise level of household during the pandemic (January 2020 to August 2021) in comparison to the pre-pandemic (January 2019 to December 2019) period.

It is observed that 52 percent of households in Kerala depended on borrowing to run the household before the pandemic. This suggests that, as reported in AIDS 2019, the state's borrowing dependency was relatively high even before the pandemic. Dependency decreased in the first wave of 2020 (January-April) due to the lockdown and related issues. It increased markedly in the second wave of 2020 (May-August) immediately after the lockdown relaxations. Eventually, it returned to the pre-pandemic level. The picture is different at the national and in high-income states, where the pandemic effect on borrowing is only evident in the first two waves of 2021.

Table 1: Borrowing dependency of the household in Kerala, India, HIS & LIS:  % of households with outstanding borrowing
STATE	2019 Jan-Apr	2019 May-Aug	2019 Sep-Dec	2020 Jan-Apr	2020 May-Aug	2020 Sep-Dec	2021 Jan-Apr	2021 May-Aug
Kerala (KL)	49.88	51.81	51.48	38.37	54.31	47.82	48.82	50.07
High Income
States (HIS)	54.06	58.41	63.13	52.8	45.83	44.75	48.94	52.52
Low Income
States (LIS)	49.53	44.87	47.38	43.16	45.44	38.95	43.93	48.27
All India	49.53	50.69	52.02	46.93	45.88	41.62	46.14	50.04
Source (Basic Data): CPHS

While almost half of Indians depended primarily on borrowed money during the Covid-19 pandemic, more than half of the Keralites depended on borrowed money. Although borrowing dependency was expected to increase in Kerala, it remained at the pre-pandemic level. This could be due to poor credit market participation of households or inadequate access to the credit market, as a result of either credit constraints of financial institutions or high cost of borrowing. A concern that follows is how the state managed its pre-pandemic levels of borrowing. The following sections explores this.

Does credit access affect household borrowings?

Credit market arrangements can be classified into formal and informal. The former includes organized, institutionalized and regulated arrangements, while the latter is unorganized and non-institutional. Developing countries are characterized by their coexistence and the success of both is essential for the progress of the economy (Rana & Viswanathan, 2019). Formal institutions find their access to credit limited in India. Households are thus forced to rely on alternative sources. Although the ease of credit accrual is more in such cases, they come with very high interest rates. Formal contracts on the other hand have very high transaction costs but are less prevalent. However, it should be kept in mind that banks have become more influential in ensuring the recovery of the economy, especially in 2008.

Borrowing from a formal institution includes: (i) borrowing from a bank,[1] (ii) borrowing from Non-Banking Financial Companies (NBFC)[2], (iii) borrowing from Self Help Groups (SHGs)[3] (iv) borrowing from Micro Finance Institutions (MFI)[4], (v) borrowing from credit cards[5], and (vi) borrowing from the employer[6]. However, CPHS data does not provide any exclusive picture on the involvement of cooperatives.

The percentage of borrowing from banks in Kerala has decreased significantly during the pandemic (Table 2). Reliance on banks for borrowing has declined from 70 percent in 2019 to 45 percent in 2021 (second wave), and further falling to 30 percent at the peak of the pandemic (May-August 2020). This implies a significant withdrawal of banks from the state's credit market. A similar trend is observed in other states and at the all-India level, at a lesser degree. Kerala has managed its pre-pandemic level of borrowing.

In Kerala, unlike other states and at the all-India level, the presence of NBFCs and MFIs has been evident during the pandemic. Household dependency increased from 6 percent in 2019 (before the pandemic) to 22 percent at the peak of the pandemic (January-April 2020), and ceased to 12 percent in 2021. This indicates that major NBFCs and MFIs in Kerala (institutions like Muthoot, Manappuram) and other small banking and finance institutions were able expand their market share in the state during the pandemic.

It is noteworthy that the lion's share of formal household credit originates from SHGs. The pandemic witnessed a three-fold increase in the percentage of households dependent on self-help groups from 15 per cent. The same cannot be said for other states or at the national level. During the pandemic, access to formal sources of credit remains elusive in the state. Contrary to what other studies suggest, the so-called formalization in Kerala is not through banks, but through intermediary SHGs and MFIs with some advantages of the informal network in the state.

 

 

Table 2: Formal sources of household borrowing
STATE	2019 Jan-Apr	2019 May -Aug	2019 Sep-Dec	2020 Jan-Apr	2020 May -Aug	2020 Sep-Dec	2021 Jan-Apr	2021 May -Aug
% of Household Borrowing from Banks
KL	68.55	67.38	68.48	48.77	28.82	43.81	44.51	45.51
HIS	29.01	27.42	25.38	23.68	18.71	18.32	20.88	20.46
LIS	21.89	21.15	19.4	18.79	20.13	16.09	17.42	17.58
ALL	26.58	25.62	23.75	21.78	19.86	18.06	19.81	19.67
% of Household Borrowing from NBFC & MFI
KL	6.29	6.17	6.84	21.8	13.65	14.79	13.33	10.05
HIS	10	10.43	7.91	8.73	11.96	14.56	14.22	14.6
LIS	2.62	3.07	2.41	4.27	3.15	2.36	1.4	2< Reference Dev, S. M., & Sengupta, R. (2020). Covid-19: Impact on the Indian economy. Indira Gandhi Institute of Development Research, Mumbai April. ECOWRAP (2021). Household Debt Increased On An Average By 1.5x Between 2012 & 2018: Benefits Of Formalisation Evident With Non-Institutional Credit Share Declining Precipitously, Issue 39, 1-5. Mitra Kumar, S. and R. Venkatachalam (2018), “Caste and Credit: A Woeful Tale?”, The Journal of Development Studies, 1-18. Rana, K., & Viswanathan, B. (2019). Household Choice of Financial Borrowing and Its Source: Multinomial Probit Model with Selection. Madras School of Economics. RBI  (2021) Preliminary Estimates of Household Financial Savings for Q3: 2020-21 and Household Debt-GDP Ratio at end-December 2020.