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Synopsis: A large proportion of the rural population is still excluded from institutional finance. Lack of marketable collateral, credit demand for consumption purposes and informational constraints are the primary reasons for it.
The All-India Debt and Investment Surveys (AIDIS), carried out by the National Statistical Office are among the most important nationally representative data sources on the rural credit market in India.
What does the AIDIS report published this month reveals?
Dominance of non-institutional sources: they have a strong presence in the rural credit market, notwithstanding the high costs involved in borrowing from them.
The incidence of indebtedness (IOI): As per the latest AIDIS report, the IOI is 35 per cent in rural India and 17.8 per cent of rural households are indebted to institutional credit agencies, 10.2 per cent to non-institutional agencies and 7 per cent to both.
Rural-urban divide: The share of debt from institutional credit agencies in total outstanding debt in rural India is 66 per cent as compared to 87 per cent in urban India. In non-institutionalised debt, professional and agricultural moneylenders remain the primary sources of credit.
What does the data revealed by AIDIS imply?
Reliance on non-institutional sources denotes vulnerability and backwardness: Continuing dependence on informal credit points to interlinkages between labour/input markets and the rural credit market.
High rate of interest: This is troubling, as the rate of interest charged on 45 per cent of institutional debt is between 10 and 15 per cent, whereas on 44 per cent of non-institutional debt it falls between 20 and 25 per cent.
Debt trap: The report shows that the top 10 per cent of asset-owning households have borrowed 80 per cent of their total debt from institutional sources, whereas those in the bottom 50 per cent borrowed around 53 per cent of total debt from non-institutional sources. Moreover, the Debt-Asset Ratio (DAR) of the bottom 10 per cent asset-owning households in rural India is 39, much higher than the DAR of 2.6 estimated for the top 10 per cent households.
This, coupled with higher borrowing from non-institutional sources, acts as a debt trap for households with fewer assets.
How socio-economic inequality shapes household indebtedness?
Institutional credit is taken mainly for farm business and housing in rural India: A significant portion of debt from non-institutional sources is used for other household expenditure.
The data indicates that better-off households have greater access to formal-sector credit and use it for more income-generating purposes.
Non-farm expenditure: The top 10 per cent of rural households in terms of asset ownership spend almost two-thirds of their institutional debt and 40 per cent of non-institutional debt on farm/non-farm business, whereas the bottom 10 per cent spend half of their total debt on household expenditure.
Social identities: The 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.
What is the way forward?
First, access to affordable credit lies is the solution of the rural distress.
Second, 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.
Source: This post is based on the article “What gives rise to the rural debt trap?” published in Indian Express on 30th Sep 2021.