Page 17 - Issue 01

Disentangling explanations: Purpose of borrowing

Examining the purpose for which households borrow can tell us something about the demand for credit.
Table 3 presents the top five reasons for borrowing in 2020, and compares it with 2019.
In May-August 2019, 62% of rural and 60% of urban borrower households had borrowed for reasons of
consumption expenditure. In May-August 2020, this had risen to 70% and 66% of rural and urban borrower
households respectively. This is consistent with the importance of consumption smoothing, and of many
households not having enough resources to survive for more than a few weeks. The increase for reasons of
consumption expenditure is higher in urban regions. Urban India was more likely to be affected because of

both the Covid infections and the intensity of the lockdown than rural India. Income transfers from the
government are also likely to have targeted rural households than urban households.

Table 3: Purpose of borrowing

There has been an increase in borrowing for business and debt-repayment reasons in this period as well.
The numbers for rolling over debt went from about 9% to 12% of borrower households in urban regions, and
from 7% to 9% of borrower households in rural regions. This suggests that households who would otherwise
have serviced debt through business or personal income took recourse to borrowing when those cashflows
subsided. A personal insolvency law that is able to provide some relief to debtors and allow for

restructuring of the larger loans can help alleviate some of this stress.

The fall in the number of borrower households seems to be driven by the fall in the borrowings for housing,
durables purchase and investments. It is also likely that large purchases such as housing and durables are
made through bank loans. The fall in the borrowings from banks may be a result of a fall in these large
durable purchases.

Conclusion

We study the response of households on borrowings during the 2020 lockdown. We do not have data on the
value of debt outstanding. We expected that there would be an increase in the number of households that
borrow owing to the disruptions to economic activity. However, it is remarkable, that despite the large
shock, overall, there has been a reduction in the number of households that borrow. This fall is driven by

fewer households borrowing from banks, and fewer households borrowing for housing, and consumer
durables purchases. Households continue to borrow for consumption expenditure, business and debt
repayment. The most utilised sources of borrowing are friends and family and shops.

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