Page 16 - Issue 01

Disentangling explanations: Sources of borrowing

Given that a large proportion of households did not have enough to live on for more than a couple of weeks,
we would have expected a huge increase in the number of borrower households. In order to investigate the

sources of this drop, we begin by analysing the role of the financial system in the household borrowing
story by studying the sources of borrowing.

Table 2 presents the percentage of borrower households borrowing from each source. We find that the
biggest drop in borrowing is from banks: in 2019, 26% of borrower households had borrowed from banks -
this has dropped to 20% in 2020. The proportion of households borrowing from money lenders has also
dropped - from 7% in 2019 to 4% in 2020. The drop in households borrowing from banks and money lenders
was higher in urban regions than rural regions. There has been a lot of discussion in India about the

increased risk aversion of banks. A fall in the number of borrower households may be a result of this
phenomenon.

Table 2: Sources of borrowing

There has been a concurrent rise in the number of households who have borrowed from friends and family
from 14% in 2019 to 21% in rural regions, and from 13% to 27% in urban regions. The sharp increase in the
borrowing from friends and family suggests that some smoothing of consumption expenditure is likely to
have occurred using informal social networks that play an important role in the economic lives of those in
developing countries (Munshi, 2014).

Household borrowing from shops increased in rural India - from 52% to 58%, and fell slightly in urban India.
It is interesting to recall that Chakraborty and Sane (2019) had found that between the years 2016 and 2018
(i.e. after demonetisation), the biggest rise in borrowing was from shops, especially by those in the lower
income deciles. This seems to be true in the current situation as well, especially in rural regions.

In difficult times, it was not banks, money lenders, and employers that mattered. It was friends and family,

and the neighbourhood shops. It appears that non-financial firms and cash flow management by the retail
supply chain have been more important than financial firms. The connections from the formal financial
system to these shops could then be unusually influential.

13