Knowledge is power! The story of debt literacy and credit usage in rural India!

Efforts to advertise financial inclusion in developing countries have observed an enormous scale-up previously decade, because of the World Bank’s promotion of “Finance for All” since 2008 and also the liberalization of credit markets around the world. It has led to a rise in the proportion from the banking population from 51 percent this year close to 69 percent in 2017 as recorded through the Global Findex database. Among developing countries, India deserves special mention like a front runner in setting a brand new institutional context of high amounts of financial inclusion by constituting around 55 percent from the global share. This transition within the financial landscape causes it to be essential to comprehend the factors that will determine using financial services through the recently banked population.

Credit is easily the most common financial service utilized in the rural parts of a developing country like India. As institutional and market-driven changes like financial innovation and democratization of credit are recent phenomena in rural regions in India, you should find out the crucial factors driving the loan behavior within this population. Within my employment market paper, we examine how credit use of rural households within this new institutional context is affected by debt literacy (the opportunity to make simple decisions regarding debt by making use of fundamental understanding about interest compounding to financial choices, as based on the literature).


Using the rollout of national-level initiatives to enhance financial inclusion in the united states (such as the Swabhimaan plan this year and also the Pradhan Mantri Jan Dhan Yojana plan in 2014), around 322.5 million accounts were opened up for that unbanked population in India in the last decade. Two states (Kerala and Goa) together with three union territories (Chandigarh, Puducherry, and Lakshadweep) grew to become the very first in the united states to attain 100 % financial inclusion (understood to be getting a minumum of one banking account per household). Within our paper, we concentrate on Kerala, where we focus on rural households and exploit a distinctive setting that enables us to look at the function of debt literacy in credit behavior.

The function of debt literacy in credit usage: How can we study it?

To look at our research question (see figure 1), we rely on primary data that people hands collected from 600 rural households across three districts in Kerala. We measure credit usage through the debt-to-asset ratio of people. To determine debt literacy, we use some questions that people developed in line with the literature. We complement our analysis having a national survey data on rural households, the NABARD All India Rural Financial Inclusion Survey 2016-17 (collected through the National Bank for Agriculture and Rural Development).

We first explore the function of debt literacy in credit usage using ordinary least squares estimation. However, to infer causality, we must address the endogeneity of debt literacy highlighted through the literature. Endogeneity of debt literacy indicates debt literacy is affected by using credit through reverse causality. To deal with potential endogeneity, we use instrumental variable regressions. We measure the financial exposure from the respondent according to when they have been learned about formal financial instruments such charge cards. We make use of this being an instrument for debt literacy because listening to charge cards may influence debt literacy inside a financially incorporated rural region as literature gives evidence that innovative formal farm credit options like Kisan Charge Cards (KCCs) are popular choices for availing institutional credit within the rural areas. Our second group of instruments would be the household head’s education and age which represent family affect on your debt literacy of respondents. Our identification strategy is dependant on the lack of any direct influence of monetary exposure or family affect on current credit usage, apart from through debt literacy. The instruments are validated by Hansen J-statistics and F-statistics in the first stage regression. Within the situation of ladies respondents, we consider “membership in group activities” as a substitute instrument in line with the literature as group participation may influence their financial abilities particularly in developing countries. We look into the sturdiness in our results via treatment effects estimation according to inverse probability weighting with regression adjustment. This can be a doubly robust method which minimizes misspecification errors in regression estimation of treatment effects according to observational data.

Exactly what do we discover?

Even just in a condition which has achieved 100 % financial inclusion, debt literacy levels are very lower in rural areas. Table 1 shows the summary statistics from the debt literacy levels within our sample from Kerala.

Next, we prove debt literacy includes a positive and important effect on credit usage, designed for farming households and ladies. This finding is within contrast with available worldwide evidence that shows an adverse aftereffect of debt literacy on the amount of credit. Our discovering that people with greater debt literacy have a tendency to hold more debt underscores the significance of debt literacy within their credit usage. We have similar results whenever we continue doing this analysis around the national-level data set.

Policy implications

We prove debt literacy increases credit usage in rural India, where an unparalleled rise in the amount of financial inclusion is going ahead. Our contention is the fact that debt literacy functions being an empowerment device, specifically for farming households and ladies in rural areas. Greater debt literacy might have helped individuals our sample seek loans along with other financial providers. For example, individuals who’re more debt literate might be more effective in producing the required documentation and finishing other complex procedures to avail more formal loans, what are predominant kinds of loan within our sample.

Our findings claim that there’s scope for policy-based methods to improve using formal financial services like bank-based credit by vulnerable sections of people, that’s, maqui berry farmers and ladies. Policy could concentrate on improving their debt literacy to beat the reduced use of financial services, hence enabling them to utilize cheaper institutional credit. Our findings offer training for banking institutions because they can use debt literacy like a factor for credit evaluation. Going beyond know-your-customer standards and earnings, it will help these to do risk-based prices and supply more financial services like cash credit and individual loans.


One limitation of the study might be that even though the instrument validity tests reveal that our instruments are dependable, we know that our instruments might not be fully exogenous towards the extent there might be unobserved confounders (for example mental factors and social norms) that we’re not able to capture. Furthermore, the generalizability in our findings will need performing similar studies in other regions.

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