This study, conducted by Pallavi Chavan in collaboration with Amalendu Das, analyses contemporary rural credit systems in India using data on household indebtedness from 20 villages across 10 States (the villages were surveyed as part of the Project on Agrarian Relations in India). The paper also uses data on household indebtedness from various rounds of the All-India Debt and Investment Survey (AIDIS) and Rural Labour Enquiry (RLE), and unit-level data from the Employment Unemployment Survey of 2009-10 to examine recent trends in the rural credit system in India. The household-level (demand-side) analysis is supported by bank-level (supply-side) analysis to examine the major developments in rural banking in India in general and the study regions in particular.

The analysis of debt profiles of rural households using AIDIS showed a perceptible decline in the 1990s, for the first time since 1951, in the share of formal sources particularly commercial banks. This decline could be seen across most States of India.

Preliminary analysis using the unit-level data from the NSSO suggests that this decline was reversed, partly but not entirely, in the second half of the 2000s. It is evident that the PARI surveys undertaken in the 2000s were in a period when considerable change was taking place in the rural credit system in the country. The 20 villages surveyed represented a good mix of well-banked and relatively under-banked areas in the country.

Certain common findings emerged from the village-level analysis:

  • A higher incidence of debt across all villages than is suggested by secondary sources of data.
  • The incidence of debt varied positively with the extent of asset holding, indicating that the households that were well-off tended to seek more debt.
  • Formal sources seemed to outweigh informal sources when the amount of debt raised from each of these sources was compared; at the same time, informal sources dominated formal sources in terms of the number of loans (with the notable exception of the study villages in Maharashtra).
  • The sections that relied heavily on informal sources in most villages were socially and economically vulnerable sections that had low access to formal credit.
  • The presence of higher interest rates was strongly correlated with the presence of informal sources in the study villages.