Financial Inclusion in India and Its Challenges

What gives rise to the rural debt trap?


From UPSC perspective, the following things are important :

Prelims level : Incidence of Indebtedness (IOI)

Mains level : Paper 3- Challenges in access to credit


The AIDIS report published this month reveals that non-institutional sources have a strong presence in the rural credit market, notwithstanding the high costs involved in borrowing from them.

Highlights of AIDIS

  • The All-India Debt and Investment Surveys (AIDIS) is carried out by the National Statistical Office.
  • AIDIS is among the most important nationally representative data sources on the rural credit market in India.
  • According to the latest report, the average debt per household in rural India is Rs 59,748, nearly half the average debt per household in urban India.
  • IOI: As per the latest AIDIS report, the incidence of indebtedness (IOI) is 35 per cent in rural India — 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.
  • Dependence on institutional source: 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.
  • Dependence on institutional sources is often seen as a positive development, signifying broadening financial inclusion, while reliance on non-institutional sources denotes vulnerability and backwardness.
  • Purpose: 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 expenditures.
  • Socio-economic inequality: The data indicates that better-off households have greater access to formal-sector credit and use it for more income-generating purposes.
  • Access to institutional credit is largely determined by the ability of households to furnish assets as collateral.
  • 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.
  • Debt-trap: 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.

Way forward

  • Inadequate access to affordable credit lies at the heart of the rural distress
  • 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.


The solution to the problem of lack of access to credit in rural areas lies in policy changes.

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