Why do Indian households borrow money?

Preetha Joseph, Raashika Moudgill

In this CEDA-CMIE bulletin, we examine the different reasons for which Indian households borrow money. We identify these trends across region, states, income groups, and over time.

Key Highlights

• Indian households borrow for a range of purposes, and trends vary across income groups and across states

• Consumption expenditure, business expenses, vehicle purchase and payment of existing debt have been the most common reasons for household borrowings

• Rural households are more likely to have borrowed than their urban counterparts

• Poorer households are the most likely to have borrowed for meeting consumption expenditure, while richer households are most likely to borrow for housing, business-related expenditure and for purchase of vehicles

In our previous CEDA-CMIE Bulletin, we had noted that half of all Indian households (50.3 percent) had borrowed money in some form or the other (as of Sep-Dec 2022). The same bulletin had identified the different sources of borrowing, and identified that credit from local shops was the most common way of borrowing in the country, followed by banks, self-help groups and relatives/friends. Building on that analysis, in this bulletin, we investigate the different reasons for which Indian households borrow money.

Figure 1

Over a third of households (33.1 percent) borrowed for consumption expenditure (as of Sep-Dec 2022). This was the most common reason for which households had borrowed money in this period, followed by borrowing to meet business expenses, repaying earlier debts, and purchasing vehicles (Figure 1).  

While borrowing for consumption was the most common reason for borrowing across rural and urban areas, there were some differences at the state level**. In Kerala, Telangana, and Andhra Pradesh, for example, the most common reason for borrowing was to repay earlier debts. These  states also have the highest level of indebtedness compared to other Indian states, according to the AIDIS 2018-19 survey. In Karnataka, Delhi and in Himachal Pradesh, on the other hand, the largest share of households that had borrowed money had done so to purchase vehicles. In Tamil Nadu, purchasing consumer durables was the most common reason for household borrowing. (Table 1)

Table 1

Consumption expenditure

A third of Indian households had borrowed for the purpose of consumption expenditure as of Sep-Dec 2022. As our previous bulletin noted, 30.5 percent of Indian households had borrowed from local shops, as of Sep-Dec 2022. CPHS data indicates that 89 percent of households that borrow for consumption do so in the form of purchasing things on credit from local shops. The rest of the households that borrow for consumption borrow from relatives/friends (8.2 percent). 

Borrowing to meet consumption expenditure is more common in rural India, where 38.3 percent households had borrowed money for this purpose as of Sep-Dec 2022, as compared to urban India where 22.4 percent of households borrowed for this purpose. From an income perspective, poorer households are more likely to have borrowed for household expenses than wealthier households. As of Sep-Dec 2022, 44 percent of households earning INR 100,000 – 200,000 per year borrowed for this purpose, while the figure for households earning more than INR 1,000,000 per year was 9.6 percent. 

Among the larger states, borrowing for consumption is most popular in Bihar, West Bengal, and Jharkhand, where 95 percent, 76 percent, and 74 percent of households respectively had borrowed for this purpose as of Sep-Dec 2022. Bihar experienced a major increase in household borrowing for consumption during the pandemic, from 44.7 percent of households borrowing for this purpose in May-Aug 2020 to 73.3 percent in Sep-Dec 2020, followed by a steady rise till Sep-Dec 2020. Studies have  identified a significant pandemic-induced shock on food consumption (Travasso et al 2023) and the rise in household borrowing for food and other household expenditure (Niyati & Vijayambain, 2021) in Bihar following the pandemic.

Borrowing for Business

Business loans can be borne by contractors, traders, self-employed professionals or even farmers. As of Sep-Dec 2022, an estimated 7.7 percent of Indian households had borrowed for business purposes – whether for running an existing business or starting a new venture.

Figure 2

Among rural areas, 9.5 percent of households had borrowed for this purpose, while in urban areas the corresponding share was 4 percent (Figure 2). This purpose of borrowing, too, has witnessed an upward trajectory since January 2018. Between Jan-Apr 2018, 4.3 percent of all Indian households were estimated to have borrowed for business reasons, with 3.3 percent of urban households and 4.8 percent of rural households falling into this category.

Compared to the rest of the country, Madhya Pradesh comprises the highest share of households (44.5 percent) that cite this purpose for borrowing. This is followed by Punjab (19.3 percent) and Odisha (16.9 percent).

Figure 3

Wealthy Indian households were most likely to have borrowed for the purpose of meeting business-related expenditure, while poorer households were the least likely to do so. 10.7 percent of households with annual income of INR 10 lakh or more had borrowed for this purpose, as of Sep-Dec 2022, while their corresponding share was 3.4 percent among households with annual income below INR 1 lakh (Figure 3). This gap is also seen in the low levels of credit disbursal to MSMEs in India. 

The data also suggests that, in general, rural households have a higher propensity to borrow for this purpose than their urban counterparts.

Borrowing to Repay Earlier Debt

Figure 4

An estimated 7.1 percent of Indian households borrowed for the purpose of repaying earlier debt, as of Sep-Dec 2022. The proportion of Indian households who borrowed for this reason has seen a steady increase in the past four years (Figure 4). In Jan-Apr 2018, 3.4 percent of households were estimated to have borrowed to repay earlier debt. This proportion increased to 4.2 percent of households in the Jan-Apr 2020 period, and further to 6.5 percent in Jan-Apr 2022. Households in urban and rural areas mirrored this trend. While 3 percent of urban households and 3.6 percent of rural households had borrowed to repay former debt (as of Jan-Apr 2018), this share had gone up to 7.1 percent among urban households and 7.1 percent among rural households, as of the Sep-Dec 2022 period.

Vehicles

The percentage of Indian households who borrowed money for the purpose of buying vehicles has seen a small increase from 3.4 percent in Jan-Apr 2018 to 5.7 percent in Sep-Dec 2022. Following the Covid-19 pandemic, the percentage of households borrowing for vehicle purchase has risen more rapidly in urban India as compared to rural India. There was a rise by 3.9 percentage points in urban households borrowing for this purpose from Sep-Dec 2020 to Sep-Dec 2022, while in rural India, this increased by 2 percentage points.  

Rising demand for vehicle loans has been observed by banks and the RBI, and this trend is expected to continue in the near future as well.

Figure 5

The growth in borrowing for the purpose of purchasing a vehicle post the pandemic is being driven by richer households, specifically those households that earn Rs 500,000 and above. Borrowing for this purpose by richer households had doubled from around 8 percent to 16 percent from Sep-Dec 2020 to Sep-Dec 2022 (Figure 5).

Figure 6

Among states, Karnataka (27.9 percent), Uttarakhand (22.2 percent), and Kerala (16.7 percent) had the highest share of households reporting this purpose for borrowing. States with the lowest share were Bihar, Uttar Pradesh and West Bengal, with less than 0.5 percent of households reporting this purpose for borrowing in these states (Figure 6). 

Housing and Consumer Durables

Housing or purchase of consumer durables was cited as reasons for borrowing by only around 2 percent of households in Sep-Dec 2022. Borrowing for these purposes has higher prevalence in urban India than in rural India. Borrowing for housing has shrunk from 4 percent to 2.2 percent between 2018 to 2022, while borrowing for consumer durables has remained at around 2 percent during the same period. Among the larger states, Tamil Nadu and Karnataka had the largest share of households borrowing for consumer durables, at 9.9 and 9.3 percent respectively, as of Sep-Dec 2022.

Notably, 22.4 percent of households in Chhattisgarh reported borrowing for housing, the highest among all states. 

Borrowing for other purposes

Less than 1 percent of Indian households reported borrowing for other purposes such as marriage, education, investment and health. Chhattisgarh stands out among the larger states, with 13 percent of households having borrowed for marriage as of Sep-Dec 2022. As of Sep-Dec 2022, richer households were more likely to borrow for the purpose of marriage and investment, while borrowing for medical expenses was greater among poorer households. 

*Analysis includes data only for 21 large states (and includes data for Delhi)

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