The following points highlight the five major causes of rural indebtedness. They are: 1. Past Indebtedness 2. Poverty 3. Land Improvement 4. Social and Other Obligations 5. Moneylenders.

Cause #  1. Past Indebtedness:

The root cause is past indebtedness. Rural debt is not only universal but hereditary. Ancestral debt is honoured in India and every villager considers it to be his sacred duty to repay the debt of his father.

This is why the Gov­ernment had provided a huge debt relief to the farmers on several occasions in the past.

Cause # 2. Poverty:

Another cause of rural indebt­edness is widespread poverty. With low income, fanners cannot save much. Thus, in case of an even­tuality such as crop failure due to natural calami­ties like floods, or failure of monsoons, the farmer has to borrow—and often at a very high rate of interest.


Moreover, the farmer has to borrow in or­der to make certain improvements on his land such as contour bounding for flood control, construc­tion and deepening of wells for irrigation or for purchasing costly implements and inputs. The farmer has to borrow because he is poor. Similarly, his persistent poverty makes it difficult for him to save and repay the loan. It is a vicious circle.

Cause # 3. Land Improvement:

Since land is the most important income-earning asset the farmers have a strong desire to make necessary improve­ments on land. This is no doubt desirable for im­proving the economic conditions of the farmers. But with little or no saving farmers have to borrow to finance the cost of such improvements. Conse­quently, they fall into a ‘debt trap’.

Cause # 4. Social and Other Obligations:

Farmers also fall in debt because they have to discharge certain social obligations irrespective of their means and resources. They have to observe reli­gious and social functions like pujas, marriages, births and deaths and so on. Moreover, they bor­row to cover the cost of litigation which is often on the high side. They also borrow to meet con­sumption needs. And they cannot repay loan in most cases.

Cause # 5. Moneylenders:

The moneylenders are also largely responsible for the huge burden of rural debt. They not only charge excessive inter­est but maintain false accounts. When the amount of debt gets accumulated over a number of years the farmer finds it difficult to repay it and is forced to surrender his land to the moneylender. This is the plight of the rural masses in India even today.


In this context one may note four important points:

1. The demand for credit far exceeds the sup­ply. So the rates of interest charged are very high and often go up to 30-35%. This is a rate of inter­est which no economic activity in the world can afford to bear. What is worse is that agriculture in India is not that productive as to enable the farmer to achieve economic self-sufficiency after paying such high interest.

2. Moreover, agriculture all along was and continues to be a gamble in monsoons. Thus, in case of crop failure, the farmer is forced to borrow and thus to run into debt and fall into a debt trap.

3. Of course, some measures have been taken in recent years to provide institutional credit sup­port to agriculture. But the agencies that supply rural credit suffer from one defect or another.


4. Institutional finance is subject to compli­cated formalities and rigid repayment conditions. The moneylender’s methods are such as to confis­cate all the resources of the debtor. The co-opera­tive societies do a lot of favouritism and give loans mostly for short-term production purposes. Me­dium and long-term institutional finance is grossly inadequate compared to needs.