Spending patterns are leaving Malayalis ‘overleveraged’

The 2019 All India Debt & Investment Survey, conducted by the National Statistical Department, found that the debt-asset ratio in rural Kerala, at 9.7%, is highest among all states.
Representative image
Representative image

KOCHI: Talking about an employee who earns around Rs 13,000 a month who took a Rs 50,000 ‘interest-free’ loan to buy a mobile phone, Nikhil Gopalakrishnan, a Kochi-based investment advisor, says, “The cost of the mobile was Rs 58,000. He put down Rs 8,000 and the remaining as loan to procure the iPhone,” “He failed to realise is that his monthly income will decline substantially due to the purchase,” Nikhil said.

The consumption levels of Keralites seem to be reaching worrying proportions with many taking loans from banks, NBFCs, unregulated entities such as chit funds, ‘kuris’, and, even the neighbourhood money lender to finance their purchases. From lavish ceremonies to foreign trips, purchase of expensive cars and motor bikes to high-end mobile phones, Malayalis are spending beyond their means, increasingly depending on high-interest loans to do so.

Last week, Mumbai-based stockbroker Elara Capital published a report which said ‘overleveraging’ was very visible among borrowers in Kerala. The report, titled ‘Parivartan - Capturing Change 2024’, has chapters on 18 states. Elara sent its 100-plus analysts to 22 states, 77 districts and 96 villages to understand the ‘character and grit’ of India, coinciding with the general election.

While the report said that India was racing ahead, it did not paint a rosy picture of Kerala. “The penetration of leverage in Kerala was sharp. Overleveraging can be gauged from the fact that on an average, loans per customer rose from three lenders to six to seven (without considering the unorganised sector). We saw cases where customers with a CIBIL score of 300 were running four active loans, with two overdue,” wrote Elara Capital analysts.

A good CIBIL score, which is between 700 to 900, improves the chance of a borrower getting loans at a lower interest rate. With household savings stagnating, leverage has risen. “We also noticed instances of suicides in small border areas amid the stress,” Elara said.

Rudra Sensarma, professor of economics at IIM Kozhikode, pointed out that overleveraging was not just a Kerala phenomenon, but an all-India trend. “It is the result of easy access to credit due to fintechs and new mobile apps,” he said.

Last November, the RBI expressed concern about the growth of personal loans and overleveraging, which was leading to regulatory tightening of lending norms.

“The problem in Kerala, as I view it, is two-fold. First, the dominance of NBFCs. In February this year there was a report showing that NBFC lending growth was the highest in Kerala (16.2%). It suggests that exposure to NBFCs is higher than to commercial banks. Ideally, NBFCs should be filling the last-mile gap and not acting as the first option for financing. Second is the high reliance of borrowers on land as an asset,” Prof Sensarma said.

A research paper, jointly authored by Prof Sensarma, research scholar Remya Tressa Jacob and Gopakumaran Nair of Nabard and published in the journal Oxford Development Studies in 2022, found that rural households in Kerala (based on a survey of three districts) are in a debt trap due to the illiquid nature of land assets.

According to Nikhil, the rise in borrowing is part of the lifestyle of Keralites, most of whom have exposure to chit fund ‘kuris’, which they do not consider a loan. “The moment you call the kuri (or capture the money), it becomes a loan,” he explained. Another trend that Nikhil notices is gold loans. “Most of the people who take gold loans don’t take back the gold. If the price of gold shoots up, they just renew the loan,” he said.

The 2019 All India Debt & Investment Survey, conducted by the National Statistical Department, found that the debt-asset ratio in rural Kerala, at 9.7%, is highest among all states. Urban Kerala ranked second, at 7.3%, after Andhra Pradesh. “Even in 2012, a rural credit survey found that Malayalis have the highest debt,” says economist Mary George.

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