Does knowledge empower? A story of debt literacy and credit usage in rural consumer finance

We study the role of debt literacy as an empowerment device in accessing credit in rural India. We use primary data collected from 600 rural households in the state of Kerala in India, that include measures of credit usage and debt literacy drawn from the literature. Using Instrumental Variable regressions, we find a positive and significant effect of debt literacy on credit usage. We find similar results in subsamples comprising of agricultural households and female respondents. This finding is in contrast withprior studies that found a negative relation between debt literacy and debt. Our finding that individualswith higher debt literacy tend to hold more debt underscores the importance of debt literacy in theirability to avail of credit. We obtain similar findings when we repeat the analysis with a national level dataset and use treatment effects based on inverse probability weighting with regression adjustment. Our findings could help financial institutions to use debt literacy training as a part of responsible lending and could also inform the design of financial education policies to address the informational and capability limitations of households.