Structure of Indebtedness of Households in Semi-Arid Tropics of India

Abstract

The credit delivery system in India comprises both formal and informal institutions. The formal system comprises commercial banks, regional rural banks and cooperatives, while the predominant informal sources of credit are commission agents, traders, friends and relatives, chit funds and more recently, self-help groups. This paper has examined aspects like (i) who gets cheaper and who gets costly loans? (ii) How different borrowers and lenders are matched to each other? (iii) For what purpose households borrow (production, consumption, investment, social)? and lastly, (iv) Are informal sources exploitative? The paper has used Village Dynamic Studies in South Asia data for 18 Semi-Arid Tropics villages in India comprising 857 households for the year 2009. The study has found that informal borrowings from relatives, friends, traders and commission agents continue to form a major source of total borrowings in the rural India. Generally, borrowings from formal sources are for large amounts at a lower interest rate compared to from informal borrowings. However, the majority of formal borrowings are skewed towards large landholders, and upper caste households who can offer collateral securities and also benefit from crop loans, for which basic eligibility criteria for getting loans is land. The borrowings from informal sources have been found distributed across all class and caste groups uniformly as these are mostly inter-personal borrowings with no collateral securities. About half of the borrowings from friends and traders carry no interest rate, but for very small amounts and for a shorter duration. However, on average informal sources have been found charging three-times interest rates that of formal sources if we account for product input-credit market linkages.