A tsunami of debt is building up in Tamil Nadu – and no one knows where it is headed

G Venkatasubramanian trots out some astonishing numbers.

Over the last 15 years, he and his fellow researchers at Pondicherry's French Institute have been studying debt bondage among families in 20 villages in Tamil Nadu. Half of these settlements are in the coastal district of Cuddalore, and the others are in the adjoining district of Villupuram.

Their study is throwing up some puzzling changes in how much these families borrow – and how.

In 2001, the average annual income of these families was Rs 16,000. Average debt was Rs 10,000. Come 2016, annual income has risen five-fold to Rs 80,000. Average debt, however, stands at Rs 250,000. This is a 25-fold increase.

How these families borrow has changed too. Earlier, only land-owning communities – Mudaliars, Chettiars or Reddiars – lent money. But now, said Venkatsubramanian, the Scheduled Castes are increasingly lending and borrowing among themselves. “A family will borrow Rs 50,000 and lend Rs 25,000,” he said.

At the same time, communities that once looked down upon moneylending are entering the trade. The Nadars of southern Tamil Nadu, for instance, have begun lending in central and northern parts of the state.

In other places, other changes

Other parts of Tamil Nadu are also seeing large changes in how people lend and borrow.

In a village near the town of Trichy, a nurse at a primary health centre flagged a spurt in debt-based consumption. People, she said requesting anonymity, “are buying apartments, plots, cars, all on loan. All this has started in the last ten years.”

In Trichy, bank officials talk about an informal lending boom. Businessmen with Rs 10 lakhs, said the manager at a Central Bank of India branch, “take a Rs 30 lakh loan, use Rs 20 lakh in their company and lend the remaining Rs 20 lakhs to others”.

They lend, he said, at very high rates. A Rs 50,000 loan has to be returned in 100 instalments of Rs 600 a day – an effective interest rate of 300%.

At the same time, bankers like him are seeing a weakening of credit culture. Loans without a security deposit, says the manager of a small branch outside Trichy, are seeing very high default rates. “Seventy five percent of my education portfolio is an NPA”, or non-performing asset that is in danger of seeing a default, he said.

In the fishing village of Pichavaram between Pondicherry and the tsunami-hammered town of Nagapattinam, fisherfolk are borrowing more. These loans are expensive – going as high as 5%-6% a month. The parties they borrow from have changed – government employees are among the new moneylenders here.

Picharvaram, Pondicherry, Trichy and Shivagangai – the fourth town from where Scroll.in reported for this story – are in and around Central Tamil Nadu. But secondary data like the NSSO's Situation Assessment Survey for agricultural households show that both borrowing and borrowers are rising across the state.

Why are farmers borrowing in Tamil Nadu?

The first part of the story is simple enough to understand. Neither traditional livelihoods (like farming or fishing) nor their modern alternatives (industrial labour, construction or trading) generate enough income to support families.

Take Sambath. A farmer in his early fifties, he lives in a village called Mahashivanendal near the town of Shivagangai. He has defaulted on the bank loan he took to build his house.

Sambath, a farmer from Mahashivanendal.

Many factors are to blame. Lying to the south of the Cauvery delta, these villages around Shivagangai used to get a soaking from both the southwest and the northeast monsoons. But now, one has faded and the patterns of the other are changing. The southwest, which used to account for 20% of Tamil Nadu's rainfall, was the first to go. For the last 20-25 years, “the southwest monsoon has completely failed", said Annasamy Narayanamoorthy, who heads the department of economics and rural development at Alagappa University in nearby Karaikkudi. "People do not rely on it any more.”

Now, the northeast monsoon – which supplies Tamil Nadu with 70% of its rainfall – is changing too. According to M Arjunan, a Communist Party of India (Marxist) leader in Shivagangai, the northeast monsoon used to lash this part of Tamil Nadu for three months – from September to November – each year. Then it shrank to a 60-day cycle – in October and November. Of late, Shivangangai has been seeing something even more abnormal: “Last monsoon, whenever a cyclone was announced in the Bay of Bengal, we got heavy rain. Otherwise, no rain,” he said.

This dwindling rain has affected his incomes in many ways. This part of Tamil Nadu used to harvest two crops a year – groundnuts with the southwest monsoon and paddy with the northeast. But now, fewer farmers are planting crops during the southwest monsoon.

The weakening of rains has also forced Sambath and his fellow villagers to sell livestock. He once had 50-60 goats. They have all been sold over the past two years. “When agriculture fails, livestock also fails," said Narayanamoorthy of Alagappa University. "Without the crop residue, you cannot keep buffaloes.”

Even with paddy, yields have fallen. At one time, said Sambath, his three acres gave him 80 konis each of paddy – a koni is the local measure of weight that translates to about 66 kilos. But now, given unpredictable rains, he gets 25 konis. "The last two years have been especially bad," he said.

Even as yields fell, farmers like him have been hit by two other factors. Farm prices have not risen enough. “One kilo of raw rice should fetch Rs 16,” he said. “But the government doesn't buy and so private traders buy at Rs 12.” At the same time, expenses on inputs like urea, wage rates have kept rising.

Between falling yields, low prices and rising expenses, he has seen margins erode.

Put it all together and it's apparent that while NSSO data for Tamil Nadu shows that gross farmer incomes have climbed from Rs 24,864 in 2002-'03 to Rs 83,760 in 2012-'13, profitability has fallen. “In the 1970s, you could invest Rs 2,000 and get back Rs 3,000,” said Narayanamoorthy. "Now, you invest Rs 40,000 and you might get back Rs 43,000."

With such economics, farmers have to borrow to plant the next year's crop. This has resulted in several farmers in the state giving up on agriculture entirely. Large swathes of farmland across the state are lying fallow, or being cut into residential plots.

Take Sambath. At one time, the land around his house used to be tilled. Now, it lies fallow with clumps of the Prosopis juliflora weed growing on it. His family's annual income is around Rs 60,000 – partly the money his son sends from Dubai and the Rs 900 he gets as pension each month from a local factory where he used to work.

It's nowhere enough, he said: “Just the monthly cost of running the house is Rs 3,000.”

Why are even those outside agriculture turning to debt?

Travelling around the state, this refrain about expenses outstripping incomes comes up repeatedly. As the previous story in this series reported, fish catches have dropped so precipitously that fishermen are borrowing to buy diesel for their next fishing trip. A woman this reporter spoke to in Valgadi, a village near Trichy, said she has one child, who goes to a school where the annual fees are Rs 30,000. Both she and her husband work and have a combined salary of Rs 7,000 a month – or Rs 84,000 a year. “Families with two children are in real trouble,” she said. “Incomes are not rising. Jobs are hard to find. People are taking up work for even Rs 2,000.”

Many shopkeepers this reporter spoke to around bus-stands in the smaller towns of the state estimated their monthly earnings between Rs 4,000-Rs 5,000. Workers in industrial clusters pegged their monthly incomes between Rs 5,500 to Rs 8,000.

This is far from unique to Tamil Nadu. Over the last two decades, says S Ananth, a researcher in Vijayawada who studies India's informal economy, with incomes growing slowly, families have begun borrowing more – for education, daily needs, medical expenses, repaying old loans and housing.

This is resulting in two outcomes. First, debt is now an integral feature of some households. In neighbouring Andhra Pradesh and Telengana, he says, some families are basing as much as 50%-60% of their expenditure on borrowed money. Second, such families live so close to the margins that any shock could easily push them into indebtedness. In Sambath's case, the push came from a medical emergency – an abdominal surgery for which he had to go to a private hospital in Madurai. (The doctors in the government hospital had told him to come back later.)

This is where things take a turn. In Tamil Nadu, however, even as the need for debt was rising, cheaper debt was vanishing. Blame that on the state government.

Why did cheaper debt disappear?

For a long time, a major source of credit for poorer households in Tamil Nadu was the state government's Self Help Group programme. NGOs banded women into groups of 15 or so women, got them bank loans and monitored repayment. Over the years, the self help groups, which started with modest bank loans of Rs 20,000 to the whole group, amped up their loans to Rs 300,000.

The weekly meeting of microfinance borrowers in a village near Villupuram.

This model ended after Jayalalitha became the chief minister in 2011. In the run-up to the previous elections, said Venkatsubramanian, “NGOs demanded the state government write off women's loans.” Stalin, the son of DMK leader K Karunanidhi, acquiesed after a meeting with 100,000 NGO leaders. His capitulation, says the researcher, underscored the power of these NGOs – “They had almost all women in the state under their ambit.”

After coming to power, Jayalalitha nationalised the self help group programme. The NGOs were turfed out. The self help groups were brought under a new structure, run by the state government in partnership with the World Bank.

The new plan left banks unenthused. In the earlier model, NGOs ensured repayment. Now, says Venkatsubramanian, with the government unwilling to provide similar comfort, bank loans to self help groups shrank.

Who are the new moneylenders?

The void was filled by new forms of formal and informal credit. At the time NGOs were active, adds Venkatsubramanian, they did not allow companies like Muthoot to enter their areas. Now, finance companies came in. In his fieldsite, Venkatsubramanian has seen Muthoot Finance and Equitas scale up their presence over the last year.

The informal market began seeing some action as well. People began borrowing from locally affluent people – those with children working abroad; the landed elite; and those with government jobs, who have assured incomes and usually a surplus too.

This fruit-seller is among those who have had to turn to the informal market.

Agreed Narayanamoorthy, “Most teachers marry only teachers – and they have a combined monthly salary of Rs 100,000. And so they lend.”

At the same time, attracted by the high returns from informal lending, new lenders came in – like the Nadars from southern Tamil Nadu. “A group of their boys will travel north, take a room in a lodge, and start lending,” said Venkatsubramanian. "Each might lend individually out of his corpus but they share info about whom they are lending to." Calledthandal, these are peculiar loans, with no collateral. They are small in size – around Rs 5,000. The lenders make an initial deduction of Rs 500 so the loan amount is actually Rs 4,500. These need to be paid back in 100 days with daily instalments of Rs 50. This works out to a monthly interest rate of 21%. If such a loan were to run on for a year – which, as short duration loans, they don't – they rate of interest would be 78%.

Yet other people, as the bank manager in Trichy says, began borrowing from banks and lending further.

Do the new lenders do due diligence before lending?

Between these new players, Tamil Nadu is seeing an intensification of lending.

Take the microfinance companies. According to the 2015 Inclusive Finance India Report, an annual report brought out by Delhi-based Access Development Services, which monitors sectors like microfinance which lend to the poor, between 2013-'14 and 2014-'15 alone, fresh loans given by microfinance institutions in Tamil Nadu rose from Rs 4,596 crores to Rs 6,941 crores. Due diligence to ensure families did not borrow more than what they can repay doesn't seem to have kept pace.

That table shows that the size of individual loans is rising. At the same time, the resources of microfinance institutions managing the lending are growing at a fraction of the disbursement rate.

Checks and balances are similarly missing in the informal economy. In his fieldsite, Venkatsubramanian is seeing an intensification of borrowing by households. “It is not only the women who borrow," he said. "The husband and the son borrow too. And each of them borrows from different places.” A woman might, he said, borrow at her house and at her sister's house. The son might borrow at her house and at his workplace.

Along with this, there is also lending. A woman might take a loan at 3% and lend it to another at 4%. All this, says the researcher, an attempt to increase lending options, to expand lending relationships.

What does all this add up to? How much debt do these households carry? It's hard to say. Credit bureaus are useless at capturing this change. They only track formal sector loans.

The microfinance institutions do not know either. Take Equitas. Its managing director, PN Vasudevan, told Scroll.in that the firm doesn't know about the informal borrowings of the households it lends to. “We do not factor these in while making our lending plans,” he said.

This is partly because such exposure is hard to quantify, he said. In addition, this is because the microfinance model, where other group members have to pay if one member defaults, ensures repayment.

As for the informal lenders, they seek to hedge their risk by mostly making small, short-term loans – Rs 5,000 to be repaid over 100 days, for instance.

But what is not known is the cumulative debt burden on these families. An indicative answer comes from NSSO data. It suggests that, around 2013, rural families' gross annual income was Rs 83,760. Their outstanding debt, Rs 115,420.

That is gross income. What is left for repaying loans – after meeting expenses – would be a fraction of that.

How are people repaying these loans?

This explosion of debt is dramatically reordering the lives of the poor in Tamil Nadu.

For repayment, families turn to desperate measures. Some, as Sambath says, sell their land. Yet others migrate to cities seeking work. In the Thagatti panchayat of Krishnagiri, one of the poorer districts of Tamil Nadu, families have to put up ration cards as collateral. Said Bhairamma, a woman in her early fifties in an Arundhatiyar (or Scheduled Caste) colony in the panchayat, “The moneylenders collect the PDS rations and sell them in the market.”

Others tie up as bonded labour with contractors for cane farming. “A family might take as much as Rs 80,000 as advance and, then, another Rs 100 or Rs 200 per day,” said Venkatsubramanian. This converts them into seasonal migrants. And, apart from assuring them an income between January and August, it also signals creditworthiness.

It, however, can also be a vise. Having repaid the loan, the families have little to live on. And so, they borrow once more and then have to get conscripted as labour once more.

Some loans, however, are more unsustainable. The lending boom has fanned a spike in consumption. Bankers in the state observe that business is not good. Even the land markets have plateaued. Asked the official in the lead banker's office in Trichy: “But people are spending. Where are they getting the money?”

Added Venkatsubramanian, “A wedding will now cost Rs 3 lakhs-Rs 5 lakhs. Marriages now take place in wedding halls. Scooters are being given as dowry. No wedding takes place without at least 10 sovereigns of gold.”

Flex boards are the new status symbols in Tamil Nadu. Here, a board announces a wedding.

Venkatsubramanian of the French Institute spoke about an old woman he had met. “She had no assets," he said. "And Rs 300,000 in loans. And now, she wanted to marry her daughter off at Rs 5 lakh. And she said she will not have any problem. She will get money two weeks before the wedding.”

But if that is the case, aren't lenders baulking? Evidently not. Lending to someone at 5% a month translates to an annual return of 60%. The lenders keep coming.

Is Tamil Nadu heading towards a sub-prime crisis?

All this is uncomfortably similar to the 2010 Microfinance crisis in Andhra Pradesh.

By 2010, loan penetration among poor households by microfinance companies had reached an astounding 910% – poor households in the state had nine microfinance loans apiece. To repay earlier loans, households were borrowing anew and getting more and more indebted.

Matters came to a head in the middle of 2010 when Andhra saw anabrupt statewide default. Similar questions need to be asked about Tamil Nadu's debt boom. Given their interest rates – and unregulated lending –how sustainable are these loans?

Signs of distress are already visible. Borrowers are defaulting on bank loans, which cannot harass clients the way the informal economy or microfinance institutions can. Sambath, for instance, has not made his house loan repayments for the last 18 months.

This cycle will continue, says MS Sriram, IIM Bangalore professor and a rural finance expert, till there is a political resolution. “A local politician might notice people are struggling to pay and pick this up as an issue," he said. "Which is when there will be a mass default.”

At that time, a great many people in Tamil Nadu – not just the banks – will lose a lot of money.