Perils of the 'push' loan phenomenon and rural India's rising debt burden

India’s fast-moving consumer goods sector grew 5.7 per cent by value and 4.1 per cent by volume in the July-September quarter driven by rural demand, consumer intelligence firm NielsenIQ said in its quarterly update last week. Yet, many feel that the state of India’s rural economy, particularly rural indebtedness, is a matter of concern. Some non-banking financial companies (NBFCs) are complicating the scene further by trying to fish in troubled waters.

 

The Reserve Bank of India (RBI) has taken note of the growing issue of “push” loans — loans that are aggressively marketed to individuals who may not fully grasp the long-term financial consequences. This is mostly happening in rural India, and a slew of factors is leading to unsustainable levels of debt.

 

One of the root causes is the lack of sufficient employment opportunities in rural India. Economic growth has not translated into adequate job creation, especially in non-farm sectors. Meanwhile, the ease of access to credit, combined with the proliferation of 24/7 delivery services, has fuelled higher consumption levels in rural pockets. This consumption is often beyond what individuals can afford, creating a significant gap between the growth in income and rising consumption needs. People are being lured into taking loans for goods and services that are not essential, further pushing them into debt.

 

As a result, rural households are increasingly depending on borrowed money to meet everyday consumption needs, a practice that is not sustainable in the long run. The problem is compounded by the fact that the income sources of the rural economy, which is largely dependent on agriculture, are unstable, affected by unpredictable monsoons, fluctuating commodity prices, and rising input costs. Instead of being mindful of this, some NBFCs are capitalising on this mismatch, providing loans for consumption, sometimes at usurious rates.

 

The loan rollover cycle is an integral part of this. It is an old practice, ingrained in the financial structure of rural India. The largest and most institutionalised example of this is crop loans. Each year, the government sets ambitious targets for banks to disburse crop loans to farmers. These loans are often rolled over year after year, especially in cases of crop failure or income shortfalls, perpetuating a cycle of debt without creating long-term solutions for financial stability.

 

The pressure on banks to meet these targets has often resulted in the loans being disbursed quickly rather than ensuring that they are utilised productively. Instead of being used for productive agricultural investment, many of these loans are deployed for meeting immediate consumption needs or to pay off older debts, deepening the rural debt crisis. Now this practice has spilled over to the vanilla NBFCs as well as those that are into microfinance. They are rolling over loans, further pushing the borrowers into debt. Of course not all the lenders are doing that, but as they say, a few bad apples spoil the whole bunch.

 

The NBFCs have stepped in to fill the vacuum created by the formal banking sector’s limited reach in rural areas. However, their interest rates — often far higher than those charged by banks — are creating an additional burden on borrowers. The RBI has raised concerns about usurious interest rates, particularly in the context of micro-loans. This has happened in the past couple of years after the banking regulator freed the interest rates in March 2022. Until then, loan rates were linked to the cost of funds. Once this was freed, almost all microlenders jacked up the rates. Initially, the excuse was to earn a little more to compensate for the losses incurred during the Covid period. Now, there is no excuse. It’s just greed.

 

Incidentally, some of the banks that have access to public deposits at far lower cost are also charging high interest rates on micro-loans, sometimes comparable to NBFCs. If NBFCs are being scrutinised for their rates, shouldn’t the same scrutiny be applied to banks? The cost of credit in rural areas is rising disproportionately to the borrowers’ capacity to repay, further worsening the cycle of debt.

 

Close to 50 per cent of individuals in rural areas have agriculture as their primary source of income, but most of them are willing to change occupations for better opportunities, says a recent report by Global Development Incubator (GDI). Compiled in partnership with Global Opportunity Youth Network, Development Intelligence Unit and Transform Rural India Foundation, the report, titled “State of Rural Youth Employment – 2024”, says that 70-85 per cent of the 5,000-odd individuals surveyed across rural India wish to be employed in small manufacturing, retail, or business sectors.

 

Launching the report, Chief Economic Adviser to the Government of India, V Anantha Nageswaran, said, “Agriculture should be an engine of growth;” it “has to be brought back into fashion”. Not-for-profit institutions, industry and academicians need to collaborate to make the sector a viable option of employment.

 

While the average agriculture growth is 3 per cent, in FY24, it was only 1.4 per cent. In January-March 2024, the farm sector grew 0.6 per cent compared with 0.4 per cent in October-December 2023.

 

The Centre for Monitoring Indian Economy points to rural wage contraction and high rural inflation. Rural wages contracted in as many as 25 of 27 months up to February 2024, when the contraction was 3.1 per cent. And, going by the Ministry of Statistics and Programme Implementation, rural inflation was higher than urban inflation in most months between March 2019 and March 2024. The trend has been continuing, thanks to high food prices. The data of the sale of fertiliser, tractors and low-end two-wheelers tell the story of rural woes succinctly.

 

The finance ministry’s latest monthly economic review highlights the moderation in urban demand. Whether we accept it or not, rural distress started unfolding before our eyes much ahead of this. The increase in consumption loans, the roll-over of crop loans, and the rising indebtedness point toward a deeper structural problem in the rural economy.

 

The government’s focus has been on increasing credit flows to rural areas, but this strategy is not addressing the root causes of rural distress: Inadequate income generation, lack of sustainable employment, and unproductive borrowing. Without addressing these foundational issues, the rural economy is at risk of sliding into deeper financial instability.

 

There is an urgent need to brainstorm on the role of credit in rural India and the impact of rising indebtedness. The key issues to ponder over are:

 

# Employment generation: There needs to be a focus on creating sustainable employment opportunities in rural areas to reduce the dependence on debt for meeting consumption needs.

 

# Loan utilisation: Rather than setting higher loan disbursement targets, both the government and the financial institutions should focus on ensuring that the loans are used productively, especially in agriculture.

 

# Regulation of interest rates: The RBI should ensure that both NBFCs and banks offer credit at reasonable interest rates, especially for vulnerable rural borrowers.

 

# Awareness and financial literacy: Renewed efforts must be made to educate rural borrowers about the consequences of over-borrowing and the importance of financial planning.

 

If these issues are not addressed in a comprehensive manner, rural indebtedness may continue to grow, creating an undercurrent of distress that could have far-reaching economic and social consequences. The time to acknowledge and address the looming rural distress is now. 

The writer is an author and senior advisor to Jana Small Finance Bank Ltd.

His latest book: Roller Coaster: An Affair with Banking. 

To read his previous columns, please log on to www.bankerstrust.in

X: @TamalBandyo