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.