However, it is the economy and related activities that have been most affected by the coronavirus-induced lockdown and subsequent reopening in a staggered manner.
While forced migration and job losses were among the visible impacts on the economy, several other aspects of economic activities are also undergoing major changes, the magnitude of which is only now being assessed.
A survey by CMIE’s Consumer Pyramids and cited in a blog titled ‘Overcoming With A Little Help From My Friends (and Merchants): Home Loans In Response To Covid-19’, revealed significant changes in the way people asked borrowed during the pandemic and the reasons they took money.
Borrowing households
The number of borrowing households, which had seen a sharp increase since 2016, fell to 45% of the population between April and September 2020. The drop was greater in urban regions than in rural ones.
A significant change: from banks to family and friends
The data collected showed a significant change in the source of loans for most people. Rather than approaching banks and other financial institutions or intermediaries, people relied more on their family and friends to finance their expenses.
The number of households that borrowed from friends and family increased from 14% in 2019 to 21% in rural regions and from 13% to 27% in urban regions.
Simultaneously, there was a drop in loans from banks and moneylenders, which fell from 25.6% to 15% in urban areas and from 26.6% to 21.9% in rural areas.
Stores remain on top
However, the main source of loans continued to be stores, whose share increased from 52% to 57.6% in rural areas in one year. However, the share of store loans declined slightly in urban areas, where it fell to 49.8% in 2020 from 50.7% in 2019.
In the post-demonetization period (between 2016 and 2018), people in the lowest income groups were more reliant on store loans. This is also valid for the current situation, especially in rural regions.
In other words, non-financial companies and the management of cash flow through retail supply chains appear to be more important than financial companies.
Needs Driven Loans
The blog also yielded an interesting insight into the purpose of borrowing, which shifted significantly from asset creation, such as buying a home or buying consumer durables, to consuming and financing debt repayment. In May-August 2019, 62% of rural borrowing households and 60% of urban borrowers had borrowed for consumption purposes. In May-August 2020, this figure had increased to 70% and 66% respectively.
Debt refinancing figures went from around 9% in 2019 to 12% in 2020 in urban regions, and from 7% to 9% in rural areas during the same period.
The drop in the number of borrowing households appears to be driven by a drop in purchases involving large amounts such as housing and durable goods that are generally made through bank loans. Many households had limited resources that could help them survive for a couple of weeks. Therefore, consumption remained one of the best options for people, especially in urban regions, since the intensity of the blockade was more severe in urban areas than in rural ones.
Based on a blog by Renuka Sane and Ajay Shah. Read the blog here
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