Debt trap problems and possible solutions: The All-India Debt and Investment Surveys (AIDIS) is one of the most prominent nationally representative data sources on the rural credit market in India, conducted by the National Statistical Office (NSO).
According to a recently published AIDIS report, non-institutional sources have a strong presence in the rural credit market, despite the fact that borrowing from them involves high costs. Inadequate access to affordable credit is at the root of rural distress.
Conclusions of the AIDIS Report:
According to the report, the average loan per household in rural India is Rs 59,748, which is almost half of the average loan per household in urban India.
A key indicator of access to credit is the incidence of indebtedness (IOI), which gives the proportion of households with outstanding debt.
According to the latest AIDIS report, the IOI in rural India is 35% – 17.8 percent of rural households are indebted to institutional credit agencies, 10.2 percent to non-institutional agencies, and 7% to both.
The share of credit taken from institutional credit agencies in the total outstanding credit is 66% in rural India as compared to 87% in urban India.
Causes of Rural Debt Trap:
Use of credit for household purposes: In order to understand how socio-economic inequality shapes household indebtedness, the motives for borrowing should be examined.
In rural India, institutional credit is mainly taken for agricultural business and housing.
A major part of the loan taken from non-institutional sources is used for other household expenses.
According to statistics, affluent households have better access to formal-sector credit and use it for higher income-generating purposes.
In terms of property ownership, the top 10% of rural households spend nearly two-thirds of their institutional credit and 40% of non-institutional credit on agriculture/non-farm business, while the bottom 10% spend half of their total household debt. spend on expenses.
Factors in social identities: Access to credit becomes complicated by the interaction of social identities. The average property ownership of SC and ST households in rural areas is one-third of that of upper-caste families.
Inadequate access to affordable credit is at the root of rural distress. Lack of marketable collateral, demand for credit for consumption purposes, and informational barriers have been the primary reasons for the exclusion of a large segment of the rural population from institutional finance.
The credit policy needs to be revised to accommodate the consumption needs of the rural poor and to explore collateral options to bring rural households under the institutional finance network.
Lack of assets for collateral with the rural poor: Access to institutional credit is largely determined by the ability of households to offer assets as collateral.
According to the report, the top 10% of households with property ownership borrowed 80% of their total credit from institutional sources, while the bottom 50% of households borrowed about 53% of their total credit from non-institutional sources.
Loan waiver policy: Loan waiver schemes impede loan discipline as farm loan waivers offer a temporary solution and may prove to be a moral hazard in the future.
This is because farmers who can pay off their loans will also be reluctant to pay them off in the hope of a loan waiver.
Way ahead:
To take measures to improve access to institutional credit: The Government of India should motivate the State Governments to complete the digitization process and updating of land records in a time-bound manner.
State governments should provide access to digital land records to banks so that they can verify the title of land and create an online encumbrance.
Increasing credit flow for allied activities: The government should set separate targets for working capital and term loans for allied activities.
Land Consolidation: State Governments should promote and conduct awareness campaigns for land consolidation so that farmers can achieve economy of scale/scale economy and get incentives to make long-term investments.
Agricultural loans against gold as collateral: At present, such loans are not marked separately in the Core Banking Solution (CBS) platform of banks.
Agricultural Loan Waiver: The Government of India and the State Governments should undertake a comprehensive review of agricultural policies and their implementation, as well as evaluate the effectiveness of the current subsidy policies with respect to agricultural inputs and credit in such a way that it reflects the holistic approach of agriculture in a sustainable manner. to improve feasibility.
Credit Guarantee Scheme for Agriculture Sector: There is no guarantee scheme available with banks to cover the default risk of borrowers in India.
The Central Government, in partnership with the State Governments, should also set up a ‘Credit Guarantee Fund’ for the agriculture sector on the lines of the credit guarantee schemes implemented in the MSMEs sector.
Achieving financial inclusion: There is a need for aggressive efforts to improve institutional credit delivery through technology-driven solutions to reduce the extent of financial exclusion of agricultural households.
Banks should seek collaboration with agri-tech companies/start-ups to provide credit to farmers in an integrated, time-bound, and efficient manner.
