Household debt burden doubles in six years

There seems to be no respite for Bangladesh as the average amount of loans per household in the country nearly doubled from 2016 to 2022. An alarming development considering the fact that the figure rose only 34 per cent in the previous six years – between 2010 and 2016.

The Household Income and Expenditure Survey (HIES 2022), published recently by the Bangladesh Bureau of Statistics (BBS), reveal that the average loan taken per household was Tk 28,062 in 2010, which increased by 34.49 per cent to Tk 37,743 in 2016.

Compared to 2016, this amount rose by 86.80 per cent to Tk 70,506 in 2022.

Analysts say the household income of many has declined mainly due to economic headwinds triggered by the Covid-19 pandemic, and people are covering household expenses by taking on debt from friends, relatives or banks. As a result, the amount of loans per household went up.

Speaking to The Business Post, Bank Management (BIBM) former director general Toufic Ahmad Choudhury said, “The amount of household debt increased in the last two to three years, especially during the Covid-19 pandemic.

“At that time, in some cases people lost their income in its entirety, and in some cases it decreased significantly. They cov-ered the deficit by borrowing from friends or relatives to bear day-to-day expenses.”

He added, “Aside from this, consumer loans taken from banks were used as consumption expenditure. Even though there is supposed to be an economic recovery following the Covid crisis, the public is currently under the pressure of inflation.

“So their income has not recovered from the pandemic dent. The rising trend in household debt can be seen in the falling trend of savings to GDP ratio.”

Bangladesh Bank data shows that in FY20, the country’s savings to GDP ratio was 27.08 per cent, which declined to 25.34 per cent in FY21 and then further slipped to 25.22 per cent in FY22.

‘Household debt increase proportional’

Mohiuddin Ahmed, project director of the Household Income and Expenditure Survey 2020-21, disagreed with the notion that the average household debt in Bangladesh increased due to the pandemic.

He pointed out, “Both the income and expenditure per household went up between 2016 and 2022. So it is natural that the debt will also go up at a proportional rate. If only the loan had increased, it could have been called an unusual phenome-non. But this is not the case.”

According to the HIES 2022, the average income per household increased by 2.02 times to Tk 32,422 in 2022 compared to 2016. Besides, per household expenditure also doubled to Tk 31,500 at the same period compared year-on-year.

Mohiuddin, also a BBS deputy director, mentioned that more detailed data on these issues will be available

after the main report is published later this year.

Zahid Hussain, former lead economist of World Bank Dhaka Office, said the household access to loans has gone up in re-cent times, so the amount of household debt has increased as well.

“However, the increase in loans throughout the urban areas compared to rural regions is contributing to the rising inequali-ty in cities.”

Urban-rural inequality rises

An analysis of the HIES 2022 report shows that from 2010 to 2022, the growth of average household debt in urban areas was much higher than in rural areas.

In 2010, the average loan amount per family in a village was Tk 21,804. The amount rose by 43.69 per cent to Tk 31,332 in 2016. It further went up by 33.79 per cent to Tk 41,921 in 2022.

Meanwhile, in urban areas, the average loan amount per household was Tk 54,122 in 2010, which then increased by 10.35 per cent to Tk 59,728 in 2016, and more than 120 per cent to Tk 1,31,395 in 2022.

Commenting on the matter, Zahid Hussain said, “The access to finance has increased in villages. But there has been faster growth in urban areas due to the increase in the number of middle class households and better access to credit.

“However, if you calculate the average loan to income ratio, new findings will come to light.”

The report shows that the average loan to income ratio in urban areas was 2.64 per cent in 2016 and 2.87 per cent in 2022. In rural areas, this ratio was 2.23 per cent in 2016 and 1.67 per cent in 2022.

Zahid Hussain pointed out, “Loans are disbursed based on income. But it appears that despite the increase in rural income, the loan to income ratio has decreased compared to urban areas. One reason for this could be that the big borrowers in the city are taking big loans.

“And I think this massive debt is one of the major causes of the income inequality plaguing Bangladesh’s cities. I think more people are taking loans in villages than ever before.”

As per the HIES report, inequality in urban areas has increased significantly in the last 12 years compared to rural areas. The GINI index of inequality in urban areas was 0.452 in 2010, which rose to 0.498 in 2016, and then further went up to 0.539 in 2022.

In comparison, the GINI index in rural areas was 0.431 in 2010, which slightly increased to 0.454 in 2016. However, inequal-ity in villages decreased in 2022, evident by the GINI index dropping to 0.446.

Financial inclusion

Along with the economic progress, financial inclusion is also rising in Bangladesh. The HIES report shows that 14 out of eve-ry 100 households in the country now have a bank account. But this number was only 7.5 per cent in 2016 and 7.41 per cent in 2010.

This indicator is more prevalent in urban areas, compared to rural regions. At present, 15.65 per cent of urban households have bank accounts, as against 13.39 per cent in rural areas.

Besides banks, the people’s tendency to make deposits in micro/financial institutions has increased. According to the re-port, 21.3 per cent of households keep money in micro/financial institutions. This rate was 15.09 per cent in 2016, and 14.51 per cent in 2010.

BIBM’s former director general Toufic Ahmad said, “Financial inclusion has increased as a result of the firm attitude of Bangladesh Bank and various government initiatives.

“Tk 10 accounts, school banking, street children’s accounts were made mandatory for banks. Apart from this, financial in-clusion has also gone up due to the bank account requirement for receiving money from government scholarships and so-cial safety net programmes.”

Though financial inclusion has increased in the country, the people’s tendency to deposit money in informal financial insti-tutions is going up. In 2022, 6.91 per cent households used to deposit money in such institutions, which was 5.3 per cent in 2016 and 5.64 per cent in 2010.

Toufic Ahmad sees the phenomenon as a positive indicator. This means that cooperative societies or similar institutions are increasing throughout society. These initiatives are contributing to the development of Bangladesh, he adds.