TERMS OF CREDIT Every loan agreement specifies an interest rate which the borrower must pay to the lender along with the In rural areas, the main demand for credit is for crop production. Crop production involves considerable costs on seeds, fertilisers, pesticides, water, electricity, repair of equipment, etc. There is a minimum stretch of three to four months between the time when the farmers buy these inputs and when they sell the crop. Farmers usually take crop loans at the beginning of the season and repay the loan after harvest.
Repayment of the loan is crucially dependent on the income from farming. . Fill the following table. .
Supposing Salim continues to get orders from traders. What would be his position after years? . What are the reasons that make Swapna’s situation so risky?
Discuss factors – pesticides; role of moneylenders; climate. Salim Swapna Why did they need credit? What was the risk? What was the outcome?
In Swapna’s case, the failure of the crop made loan repayment impossible. She had to sell part of the land to repay the loan. Credit, instead of helping Swapna improve her earnings, left her worse off. This is an example of what is commonly called debt-trap.
Credit in this case pushes the borrower into a situation from which recovery is very painful. In one situation credit helps to increase earnings and therefore the person is better off than before. In another situation, because of the crop failure, credit pushes the person into a debt trap. To repay her loan she has to sell a portion of her land.
She is clearly much worse off than before. Whether credit would be useful or not, therefore, depends on the risks in the situation and whether there is some support, in case of loss. repayment of the principal. In addition, lenders may demand collateral (security) against loans.
Collateral is an asset that the borrower owns (such as land, building, vehicle, livestocks, deposits with banks) and uses this as a guarantee to a lender until the loan is repaid. If the borrower fails to repay the loan, the lender has the right to sell the asset or collateral to obtain payment. Property such as land titles, deposits with banks, livestock are some common examples of collateral used for borrowing.