Analyse the credit situation faced by dala ramkali and savitha on the following headings

• Answer:

   

  Loan amount (In Rupees)	5 Lakhs
  Duration of loan	10 years
  Documents required	Salary slips, employment record
  Interest rate	12% per annum
  Mode of repayment	Monthly installment in cash/by cheque
  Collateral	New house papers

   
  

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Page 2

• Answer:

  Lenders ask for collateral while lending because if payment of interest and repayment of the principal are not made on time, as the last resort the lenders can sell the collateral assets and recover their money. 
  

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Page 3

• Answer:

  Poor have low capacity to borrow since they have no collateral to offer. As such, they cannot get any credit from formal sources of credit like banks and co-operatives. They mostly take loans from informal sources of credit like money lenders, friends, relatives, etc.  
  

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• Answer:

  Various sources of credit in village Sonpur are   (i) Village moneylender   (ii) Traders   (iii) Landowner as moneylender   (iv) Commercial banks                     (v) Krishak co-operative society  
  

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Page 7

• Answer:

  (a) Terms of credit for small farmer   • High rate of interest.   • Promise to sell crops to traders at low prices as repayment of loan.   (b) Terms of credit for medium farmer.   • They can take loans from banks or from co-operatives who charge very low rate of interest.   • Loan can be paid back in the next three years.   (c) Landless agricultural workers in Sonpur   • Borrower has no means to repay the loan in cash. So, he pledges to repay loans by working for the landowner   • Rate of interest is high.  
  

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Page 8

• Answer:

  Arun gets a loan from the commercial bank at a rate of interest 8.5% per annum, while Shyamal gets loans from a village moneylender al an interest rate of 5% per month (i.e., 60% per annum). Arun has the capacity to pay bank loans as compared to Shyamal and gets a fresh loan in next three years. Like Shyamal he is not bound to sell his produce to the moneylenders who give a low price. He can sell his produce at market rates.  
  

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Page 9

• Answer:

  Everyone cannot get credit at a cheep rate. Only the following people are able to get it                 • Who have some collateral.   • Who have organised themselves into co-operative society.   • Who can fulfil the banks documentation requirements.  
  

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Page 10

• Answer:

  (i)(a) will rise.   (ii)(b) banks demand collateral which everyone cannot provide.
  

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Page 11

• Answer:

  Do it yourself (A practical question, which can be attempted by collecting various views).  
  

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• Answer:

   

  Points on Which Different	Formal Sources of Credit	Informal Sources of Credit
  Borrower's capability	Richer people having assets which can be pledged as collateral	Poorer people not having assets which can be pledged
  Rate of interest	Reasonably low	Very high
  Sources	Banks   and   co-operative societies	Traders,moneylenders, landowners, etc
  Action on default of payment	Collateral can be confiscated and sold to recover the loan	Borrowers can be made as bonded labourers or made to part with land owned by them

   
  

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Page 13

• Answer:

  Credit at reasonable rates should be available for all, so that the poor people can benefit from the cheaper loans.  
  

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Page 14

• Answer:

  There should be a supervisor for checking the loan activities of Informal lenders. However, its task is quite difficult because informal sector constitutes many people who have different kind of business of their own, besides lending. They are not registered with the government.  
  

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Page 15

• Answer:

  The share of the formal sector credit is higher for the richer households because the richer households are in a better position to provide collateral and other necessary documents which are required by the banks and co-operatives. Richer households have means to exert pressure on banks and co-operatives to sanction loans. Richer households have greater capacity to repay the loans compared to the poor households.   
  

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Page 16

• Answer:

  It is true that in situations with high risks, credit might create problems for the borrower, e.g., a small farmer takes a loan to meet the expenses of cultivation, hoping that his harvest would help him to repay the loan. But if his crop fails due to shortage of rain or for any other reason, he will be unable to repay the loan. In such situations a small farmer has to sell a part of his land to repay the loan. Such cases have high risks because the payment of loan entirely depends on good a crop which in turn depends on good rain. HYV seeds fertilizers, pesticides and other factors. This type of loan pushes the farmer into a debt-trap in the case of crop failure and the position of the farmer becomes worse off than before.  
  

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Page 17

• Answer:

  Double coincidence of wants is an essential feature in a barter system where goods are directly exchanged without the use of money. Bill on other hand in an economy where money is in use, by providing the crucial intermediate step, it eliminates the need for double coincidence of wants. A person holding money can easily exchange if for any commodity in service that he or she might want. e.g., it is no longer necessary for shoemaker to look for a farmer who will buy these shoes and at the same time sell him rice. All he has to do is find a buyer for his shoes. Once he has exchanged his shoes for money he can purchase rice or any commodity in the market.  
  

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Page 18

• Answer:

  Banks use the major portion of deposits with them to extend loans to people who need money. There is a huge demand for loans for various economic activities. In this way, banks mediate between those who have surplus funds and those who are in need of these funds. Banks charge a higher rate of interest on loans compared to what they offer on deposits. The difference between what is charged from borrowers and what is paid to depositors is their main source of income. Thus, by accepting deposits and by advancing loans, banks mediate between those who have surplus money and those who need money.    
  

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Page 19

• Answer:

  The following words are written at the top of a 10 rupees note ‘I Promise To Pay The Bearer The Sum Of Ten Rupees.'Governor' Reserve Bank of India Guaranted by the Central Government'. A 10 Rupee note is acceptable as a medium of exchange because this is authorized by the government of the country. In India, the Reserve Bank of India issues currency notes on behalf of the Central Government. As her Indian Law, no other individual or organization is allowed to issue currency.  
  

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Page 20

• Answer:

  The formal sector still meets only about half of the total credit needs of the rural people. The remaining credit needs are met from informal sources. Most loans from informal lenders carry a very high interest. The formal sources of credit for lending need to expand their operations particularly in rural areas, so that the dependence, on informal sources of credit reduces.  
  

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Page 21

• Answer:

  The basic idea behind the SHGs is meant to create self - employment opportunities for the poor. The SHGs help poor borrowers to overcome the problem of lack of collateral. They can get timely loans for a variety of purposes and at a reasonable interest rate. Moreover, SHGs are the building blocks of organizations of rural poor.  
  

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Page 22

• Answer:

  A number of borrowers have no collateral to pledge against loans. Collateral is an asset that the borrower owns and pledges as a guarantee to the lender until the loan is repaid. The main demand for loans is for crop production. Repayment of the loan is crucially dependent on the income from farming. Whether loans would be useful or not, therefore, depends on the risks in the situation. That is why, banks have no interest to lend to such borrowers. Thus, the banks might not be willing to lend to those borrowers who have no collateral and whose repaying capacity is not guaranteed.  
  

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Page 23

• Answer:

  The Reserve Bank of India supervises the functioning of banks in the following ways (a) The RBI monitors the banks in maintaining a minimum cash balance out of the deposits they receive.   (b) The RBI sees that the banks give loans not just to profit-making business and traders but also to small cultivators, small scale industries, small borrowers etc. This is done by periodical statements submitted by banks to RBI which contain information regarding how much the banks are lending to whom, at what rate of interest, etc.   (c) This supervision is necessary to ensure that equality is preserved in business and industry so that small industries also grow. Also, RBI makes sure that banks do not loan out more money than they are supposed to, as this can lead to crisis situations. An example is the great depression of the 1930s, as it affected the world economy.  
  

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Page 24

• Answer:

  Development is sustained by a proper credit policy. By giving loans to industries and trade, banks provide them with the necessary funds for carrying on their business without problems. This results in increased production and services, more employment and also profits. Caution is employed by the lenders when high risks are expected, so that there are no losses. Credit from the formal sector needs to be increased as loans from the informal sector, which have very high interest rates, do more harm than good. For this reason, it is important that the formal sector gives out more loans so that borrowers are not exploited by informal sector moneylenders, and the results definitely will contribute to national development. 
  

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Page 25

• Answer:

  Manav will decide whether to borrow from a bank or moneylender on the following terms of the loan.   (a) The documentaion and collateral required (he should be able to make these available).   (b) The rate of interest charged.   (c) The mode of repayment (periodicity, cash/kind, etc)   (d) The penalty in case of default in repayment.  
  

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Page 26

• Answer:

  (a) Small farmers normally have no collateral to pledge against loans. Collateral is an asset that the borrower owns and uses this as a guarantee to a lender until the loan is repaid. That is why banks have no interest to lend to small farmers.   (b) These small farmers take loans from co-operatives, SGHs and informal lenders like moneylenders, traders, employers, relatives and friends, etc.   (c) An example of unfavourable terms of credit for the small farmer is Shiva is a small farmer. He borrows money at the rate of 4 % per month (i.e., 48 % per annum) from a local moneylender to qrow his crop. But the crop fails due to severe drought. As a result Shiva has to sell a part of his land to repay the loan. Now his condition becomes worse than before.   (d) Small farmers can get cheap credit from sources like regional rural banks, agricultural co-operatives and SHGs.   
  

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