India Ratings and Research's (Ind-Ra) analysis of the All India Debt and Investment Survey (AIDIS) data shows that the household indebtedness, both in rural and urban areas, was higher in southern states than rest of India over 2013-2019.
In 2019, Telangana with 67.2% had the highest proportion of its rural households indebted and Nagaland with 6.6% had the lowest proportion of its rural households indebted. On the other hand, Kerala with 47.8% of urban households indebted had the highest incidence of indebtedness among the urban households and Meghalaya with 5.1% the lowest. Among the major states, the lowest proportion of indebted households in rural areas were in Uttarakhand and in urban areas in Chhattisgarh.
Per capita income in southern states was higher than other states of the country, yet a higher indebtedness in both rural and urban households in these states may appear counter intuitive. Ind-Ra believes that one of the ways to understand this dichotomy is to look into the average amount of household debt, average value of household assets and the debt-asset ratio as quite often the quantum of debt is linked to the assets one holds and/or can pledge.
With the exception of Kerala, although a higher incidence of indebtedness in both rural and urban households in southern states did not find a reflection in either a high average amount of debt per indebted household or a high average value of assets per rural household, these states had a high debt to asset ratio in 2019. Four southern states - Andhra Pradesh, Kerala, Tamil Nadu and Telangana - figured among the five states having the highest debt to asset ratio both for rural and urban households. Even the fifth southern Indian state Karnataka has a debt to asset ratio higher than all India average both for rural and urban households. This indicates that not only a higher proportion of households in southern states are indebted, but they were also more leveraged. However, on the positive side all southern states, except Kerala, show a decline in the debt to asset ratio in 2019 compared to 2013. The sharpest decline in debt to asset ratio both for rural and urban household was noticed in Andhra Pradesh.
Higher leverage is often interpreted as a sign of financial vulnerability. Ind-Ra believes the ability to take higher debt and service the same is also linked to the asset/income profile of the households. All southern states, except Kerala, have the average value of asset per household lower than all India average. But, all southern states have a per capita income higher than national average. In fact, four southern states namely Telangana, Karnataka, Kerala and Tamil Nadu figure in the top six major states in terms of per capita income in FY20. The data shows that southern states also witnessed higher per capita income growth than the national average during 2013-2019. It appears that the higher per capita income and higher per capita income growth in combination with higher financial penetration/inclusion perhaps has resulted in higher incidence of indebtedness as well as higher leverage among the households in these states. However, for what purpose these loans are taken may provide further insights into why indebtedness among the households of southern states is relatively high.