NCERT Solutions for Class 10 Social Science History Chapter 3
Social Science Class 10 Economics
Money and Credit 3
Important NCERT Questions Based on new NCERT Books for Session 2022-2023
Questions No: 11 Part: c
Explain with an example how the terms of credit can be unfavorable for the small farmer.
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The terms of credit can be unfavourable for the small farmer which can be explained by the following – a small farmer borrows from a local moneylender at a high rate of interest of 10 percent to grow rice. But the crop is hit by drought and it fails. As a result, farmer has to sell a part of the land to repay the loan. He is caught in a debt trap.
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Apart from bank, the small farmers can borrow from local money lenders, agricultural traders, big landlords, cooperatives and SHGs etc. Borrowing from middlemen and moneylenders is not always favourable and they end up in a debt trap.
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Example:
Rahul, a small farmer, needs a loan of Rs. 50,000 to buy seeds and fertilizers for his upcoming crop. He approaches a local moneylender and a cooperative credit society for the loan.
Terms from the Moneylender:
– Interest Rate: The moneylender offers the loan at an interest rate of 5% per month.
– Repayment Schedule: The loan must be repaid in six months, with interest compounded monthly.
– Collateral Requirement: The moneylender demands Rahul’s land deed as collateral.
– Total Interest Payable: Over six months, Rahul would pay Rs. 15,000 as interest (Rs. 2,500 per month), totaling Rs. 65,000 to be repaid at the end of the term.
Terms from the Cooperative Credit Society:
– Interest Rate: The cooperative offers the loan at an interest rate of 1% per month.
– Repayment Schedule: The loan must be repaid in twelve months, with interest compounded quarterly.
– Collateral Requirement: The cooperative asks for a group guarantee from other members instead of land as collateral.
– Total Interest Payable: Over twelve months, Rahul would pay Rs. 6,000 as interest, totaling Rs. 56,000 to be repaid at the end of the term.
Analysis:
– The moneylender’s terms involve a much higher interest rate and shorter repayment period, resulting in a higher total interest payable compared to the cooperative.
– Rahul might face difficulties repaying the moneylender’s loan due to the high monthly interest burden, risking losing his land if he fails to repay on time.
– The cooperative’s longer repayment period and lower interest rate offer more flexibility for Rahul, making the loan more manageable and less risky.
Conclusion:
In this example, the moneylender’s terms impose a heavy financial burden on Rahul, making it challenging for him to repay the loan on time. The higher interest rate and shorter repayment period create unfavorable conditions, potentially leading to financial stress or loss of collateral for the small farmer. Conversely, the cooperative’s terms offer more favorable and manageable conditions for borrowing.