Is rural household debt sustainable in a financially included region? Evidence from three districts of Kerala, India

ABSTRACT

This paper explores whether institutional change brought about by financial inclusion results in sustainable debt management by households. We analyze household indebtedness and its various dimensions using primary data collected from 600 households across 3 districts of rural Kerala in India. We find that more than half of the sample households are indebted. Using flow and stock analysis, we assess the repayment capacity of households. While the flow analysis based on interest and income comparison shows that debt is sustainable, the stock analysis indicates an alarming debt situation considering the illiquid nature of land assets. Both agricultural and non-agricultural households appeared to be caught in a debt trap. Our econometric analyses show that socio-economic factors like education and age of the household head, main source of household income and household asset value without land, are significant determinants of household level indebtedness.

KEYWORDS:

• Financial inclusion
• household debt
• repayment capacity
• rural India

Acknowledgment

The authors acknowledge financial assistance under R & D Fund received from the National Bank for Agriculture and Rural Development (NABARD) for a study on ‘Indebtedness or Debt Trap? A case study of rural households in Kerala’ which forms the basis for this paper. However, the views expressed here are solely of the authors and not of NABARD. We thank participants at the 7th Annual International Conference on Sustainability (SUSCON VII) held at IIM Shillong, India (from 29 November to 1 December 2018) for useful comments. We acknowledge the helpful feedback from Steve Wiggins of the Overseas Development Institute on an earlier version of this paper. We are grateful to the associate editor and two reviewers of this journal for their insightful comments.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 The World Bank’s Global Findex Report 2017 considers an adult to be financially included if s/he has an account at a financial institution (such as a bank, microfinance institution or any other regulated financial institution) or a mobile money provider (Demirgüç – Kunt et al., 2018). However, this definition does not consider the level of usage of the account.

2 Pradhan Mantri Jan Dhan Yojana. Department of Financial Services, Ministry of Finance, Government of India. Retrieved from PMJDY website: https://pmjdy.gov.in/

3 NABARD All India Rural Financial Inclusion Survey 2016–2017. National Bank for Agriculture and Rural Development Department of Economic Analysis & Research. Retrieved from: https://www.nabard.org/auth/writereaddata/tender/1608180417NABARD-Repo-16_Web_P.pdf

4 In 2014, the Government of India’s Ministry of Finance declared that the states of Kerala and Goa along with three Union territories achieved 100% financial inclusion in terms of coverage of all households with at least one bank account. This is aligned with the definition of financial inclusion in the World Bank’s Global Findex report 2017 mentioned in footnote 1. Source: Two states, three UTs achieve 100% inclusion in Jan Dhan (15 November 2014). ENS Economic Bureau. Retrieved from: https://indianexpress.com/article/business/business-others/two-states-three-uts-achieve-100-inclusion-in-jan-dhan/

5 A debt trap is a situation when a borrower is unable to manage or repay a loan (Shekhar, 2021).

6 Our classification of agricultural and non-agricultural households is based on the main source of income for livelihood reported by the respondent.

7 Kudumbashree is a women’s Self-Help Group (SHG) whose members undertake various economic and social activities on behalf of the state government and local governments.

8 We have classified households into agricultural and non-agricultural households based on their main source of income. There could be cases where a household’s main source of income is from agriculture, but the household head is having some job in non-agricultural sector which explains the remaining 11%.

9 56% of the sample have availed formal credit (338 households out of 600, among which 180 are Agricultural and 158 are Non-agricultural households).

10 Key Indicators of Debt and Investment in India, NSS 70th Round 2013, December 2014. National Sample Survey Office, Ministry of Statistics and Program Implementation (MOSPI). Retrieved from MOSPI website: http://www.mospi.gov.in/sites/default/files/publication_reports/KI_70_18.2_19dec14.pdf

11 NABARD All India Rural Financial Inclusion Survey 2016–2017. National Bank for Agriculture and Rural Development Department of Economic Analysis & Research. Retrieved from: https://www.nabard.org/auth/writereaddata/tender/1608180417NABARD-Repo-16_Web_P.pdf

12 We estimated the treatment effect of being an agricultural household on indebtedness and find the average treatment effect on the treated (ATET) to be positive and statistically significant. Results are not reported to save space but available on request.

Additional information

Funding

This work was supported by the National Bank for Agriculture and Rural Development (NABARD), India [No. NB/DEAR/Collaborative Studies/01/CS-06/2016-17].

Notes on contributors

Remya Tressa Jacob

Remya Tressa Jacob received her PhD in Management (Economics) from the Indian Institute of Management Kozhikode (IIMK), India and was also a Commonwealth Split-Site scholar at the Department of Economics, University of Essex, UK. Her research interests include Household Finance, Development Economics and Financial Literacy.

Rudra Sensarma

Rudra Sensarma is a Professor of Economics at the Indian Institute of Management (IIM) Kozhikode, India. Previously, he worked at the Reserve Bank of India, IIM Lucknow, University of Birmingham and University of Hertfordshire. He is an applied economist with interest across areas like banking, macroeconomics, financial markets and development policy. He has extensively published in scholarly journals and conducted projects for public and private sector agencies on public policy and economic forecasting.

Gopakumaran Nair

Gopakumaran Nair is the Chief General Manager at the National Bank for Agriculture and Rural Development (NABARD), Kerala Regional Office, Thiruvananthapuram. He received his PhD in Economics from Kerala University, India and joined NABARD as an economist in 1996 and conducted over 90 field- based studies for NABARD and its subsidiary, NABCONS. He worked in various capacities in the regional offices of NABARD in Chennai, head office, Mumbai, Arunachal Pradesh and Jharkhand and has vast experience in the field of developmental banking. His research interests include Financial Inclusion, Micro Finance and Development Banking.