The Rural Debt Trap

Context: The All-India Debt and Investment Surveys (AIDIS), carried out by the National Statistical Office shows inadequate access to affordable credit lies at the heart of rural distress.

India’s worsening rural household debt crisis: Insights from AIDIS survey

• Debt-divide: The average debt per household in rural India is Rs 59,748, nearly half the average debt per household in urban India.
  • Incidence of indebtedness, proportion of households having outstanding loans is 35% in rural India
• Non-institutional sources have a strong presence in the rural credit market: 8% of rural households are indebted to institutional credit agencies, 10.2% to non-institutional agencies and 7 per cent to both.
  • Share of debt from institutional credit agencies in total outstanding debt in rural India is 66% as compared to 87% in urban India.
  • Sources of non-institutionalised credit includes professional and agricultural moneylenders.
• Huge costs associated with non-institutional credit: Rate of interest charged on 45% of institutional debt is between 10 and 15%, whereas on 44% of non-institutional debt it falls between 20 and 25%.
• Divide in purpose of debt: Institutional credit is taken mainly for farm business and housing in rural India, whereas a significant portion of debt from non-institutional sources is used for other household expenditure.
  • Better-off households have greater access to formal-sector credit and use it for more income-generating purposes.
  • Top 10% rural households in terms of asset ownership spend almost two-thirds of their institutional debt and 40% of non-institutional debt on farm/non-farm business, whereas the bottom 10 per cent spend half of their total debt on household expenditure.
• Divide in debt profile: Top 10% of asset-owning households have borrowed 80% of their total debt from institutional sources, whereas those in the bottom 50% borrowed around 53 per cent of total debt from non-institutional sources.
  • Debt-Asset Ratio (DAR) of the bottom 10% asset-owning households in rural India is 39, much higher than the DAR of 2.6 estimated for the top 10% households.
• Access to credit is complicated by interplay of social identities: Average asset ownership of Scheduled Caste and Scheduled Tribe households in rural areas is one-third as compared to upper-caste households.
  • The low asset ownership of marginalised social groups curtails their access to institutional credit.

Conclusion: The credit policy needs to be revamped to accommodate the consumption needs of the rural poor and to find alternatives for collateral to bring the rural households within the network of institutional finance.