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This paper explores whether institutional change brought about by financial inclusion results in sustainable debt management by households. We analyze household indebtedness and its various dimensions using primary data collected from 600 households across 3 districts of rural Kerala in India. We find that more than half of the sample households are indebted. Using flow and stock analysis, we assess the repayment capacity of households. While the flow analysis based on interest and income comparison shows that debt is sustainable, the stock analysis indicates an alarming debt situation considering the illiquid nature of land assets. Both agricultural and non-agricultural households appeared to be caught in a debt trap. Our econometric analyses show that socio-economic factors like education and age of the household head, main source of household income and household asset value without land, are significant determinants of household level indebtedness. [ABSTRACT FROM AUTHOR]