Question

Shyamal tells us that every season he needs loans for cultivation on his 1.5 acres of land. Till a few years back, he would borrow money from the village moneylender at an interest rate of five per cent per month (60% per annum). For the last few years, Shyamal has been borrowing from an agricultural trader in the village at an interest rate of three per cent per month. At the beginning of the cropping season, the trader supplies the farm inputs on credit, which is to be repaid when the crops are ready for harvest. Besides the interest charge on the loan, the trader also makes the farmers promise to sell the crop to him. This way the trader can ensure that the money is repaid promptly. Also, since the crop prices are low after the harvest, the trader is able to make a profit from buying the crop at a low price from the farmers and then selling it later when the price has risen.

We next meet Arun who is supervising the work of one farm labourer. Arun has seven acres of land. He is one of the few persons in Sonpur to receive bank loan for cultivation. The interest rate on the loan is 8.5 per cent per annum, and can be repaid anytime in the next three years. Arun plans to repay the loan after harvest by selling a part of the crop. He then intends to store the rest of the potatoes in a cold storage and apply for a fresh loan from the bank against the cold storage receipt. The bank offers this facility to farmers who have taken crop loan from them.

Rama is working in a neighbouring field. She works as an agricultural labourer. There are several months in the year when Rama has no work, and needs credit to meet the daily expenses. Expenses on sudden illnesses or functions in the family are also met through loans. Rama has to depend on her employer, a medium landowner in Sonpur, for credit. The landowner charges an interest rate of 5 per cent per month. Rama repays the money by working for the landowner. Most of the time, Rama has to take a fresh loan, before the previous loan has been repaid. At present, she owes the landowner Rs 5,000. Though the landowner doesn’t treat her well, she continues to work for him since she can get loans from him when in need. Rama tells us that the only source of credit for the landless people in Sonpur are the landowner-employers.

1. List the various sources of credit in Sonpur.
2. Underline the various uses of credit in Sonpur in the above passages.
3. Compare the terms of credit for the small farmer, the medium farmer and the landless agricultural worker in Sonpur.
4. Why will Arun have a higher income from cultivation compared to Shyamal?
5. Can everyone in Sonpur get credit at a cheap rate? Who are the people who can?
6. Choose the correct answer.
   1. Over the years, Rama’s debt ______.
      • will rise
      • will remain constant
      • will decline
   2. Arun is one of the few people in Sonpur to take a bank loan because ______.
      • other people in the village prefer to borrow from the moneylenders
      • banks demand collateral which everyone cannot provide
      • interest rate on bank loans is same as the interest rate charged by the traders
7. Talk to some people to find out the credit arrangements that exist in your area. Record your conversation. Note the differences in the terms of credit across people.

Answer 1

1. The following are the various sources of credit in Sonpur:
   1. Bank
   2. landowner
   3. Moneylender
   4. Agricultural trader
   5. Agricultural Merchants Committee
2. The various uses of credit in Sonpur in the above passages are:
   1. Farm inputs like seed, pesticides, fertilizer etc.
   2. Rent of cold storage
   3. Illness, Function
3. 1. Small farmers: They are typically unable to provide collateral and are granted loans by local money lenders. The terms are:
      • High rate of interest of five per cent per month (60% per annum).
      • Repayable in a year.
   2. Medium farmer: They provide land or farm machinery as collateral. They frequently get loans from commercial banks. The terms are:
      • Low rate of interest i.e. 8.5 per cent per annum
      • Loan can be easily paid in the next 2-3 years.
   3. Landless agricultural workers of Sonpur: The terms are:
      • Borrowers pay their debts by labouring on the land of their moneylenders or landowners, allowing them to borrow from that person again in the future.
      • The rate of interest is high i.e 5% per month.
4. Following are the reasons, why Arun will have a higher income from cultivation compared to Shyamal:
   1. Arun gets a loan from a commercial bank at an annual interest rate of 8.5%, but Shyamal obtains a loan from a village moneylender at a monthly interest rate of 5% (or 60%).
   2. Arun is not restricted from selling his product at a low price. He has the advantage of selling his product at a market price.
   3. He can store his stuff in cold storage and wait for prices to increase.
   4. He can also obtain additional loans against his produce.
   5. Arun has more land than Shyamal.
5. No, not everyone can acquire credit at a cheap rate. The following people are able to get it:
   1. People have some collateral with them.
   2. People who have organised themselves into a cooperative society.
6. 1. Over the years, Rama’s debt will rise.
   2. run is one of the few people in Sonpur to take a bank loan because banks demand collateral which everyone cannot provide.
7. I talked with a few people in my area and inquired about the terms and conditions of their loan applications, as well as where they borrowed money. Different people provided different responses:
   1. Few said that they do not borrow money because they cannot afford to repay their loans on time, thus they avoid borrowing and lending.
   2. Some of them stated that they borrow money from relatives and friends since the interest rates are cheap, and occasionally, there is no interest at all.
   3. A few of them said they borrow money from commercial banks, which charge exorbitant interest rates and need collateral as well as additional documentation formalities.
   4. Some people continue to borrow from local money lenders at extremely high interest rates for short periods of time. It is because they offer faster loans and require less documentation.