What gives rise to the rural debt trap?

India Oct 06, 2021

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The AIDIS, a national statistical office, ranks as one of India's most significant representative sources of data about the rural finance sector. Easy, timely access to formal loans allows households to invest in revenue-generating industries. Non-institutional sources in their absence can satisfy short-term consumption requirements. This month's AIDIS study indicates a substantial presence in rural loan markets of non-institutional sources despite the large expenses associated with borrowing.

The research states that rural India's average household debt is Rs 59,748, about half the average family debt in urban India. The impact of debt (IOI) is a significant measure of access to credit — the proportion of households that have outstanding lending on June 30 of the year the enquiry is carried out (2019 in this case). According to the recent AIDIS study, in rural India it accounts for 35% of the IOI – 17.8% of rural households owe the credit institutions, 10.2% owe the non-institutional agencies and 7% owe the two. Institutional dependence is typically seen as a positive development which implies more financial inclusion, whereas r is a favourable development.

Total outstanding debt in rural India accounts for 66 percent of institutional credit agency debt compared with 87 percent in urban India. Professional and agrarian lenders continue to be the primary sources of credit in non-institutionalized debt. Increasing dependency on informal loans leads to links between labour and input markets and rural credit markets. The interest rate of 45% of institutional debt varies from 10 to 15%, but it drops to 20 to 25% of non-institutional debt varies from 44%, which is alarming.

The purpose of borrowing has to be studied in order to find out how socioeconomic disparity shapes domestic debt. Institutional loans are generally made for rural Indian agriculture and housing. For additional home expenses, a considerable part of non-institutional debt is leveraged. The research shows better households have more access to credit from the formal sector and exploit it to generate more income. As for properties, the top 10 percent of rural families are spending nearly two-thirds of their institutional debt and 40 percent of non-institutional debt on farm/non-farm business.

The interdependence of social identities hinders access to financial services. In rural regions, the average acquisition of Scheduled Caste and Scheduled Tribe families is 1/3, compared with homes in the high caste. The inadequate ownership of social groups who are marginalised restricts their access to institutional financing.

The core of rural suffering lies inadequate access to inexpensive financing. The prime reason for the fact that a substantial percentage of the countryside is excluded from institutional finance is the lack of marketable collateral, credit demand for consumption and information limitations. The credit policy should be revised to address the consumer requirements of rural poor people and to identify alternatives to collateralize rural families in the institutional finance network.

This article has been written by Karishma Malhotra for The Paradigm

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