Question

In India, about 80 per cent of farmers are small farmers, who need credit for cultivation. a. Why might banks be unwilling to lend to small farmers? b. What are the other sources from which the small farmers can borrow? c. Explain with an example of how the terms of credit can be unfavourable for the small farmer. d. Suggest some ways by which small farmers can get cheap credit.

Answer 1

a) Why might banks be unwilling to lend to small farmers?

• Usually banks do not have a presence in every rural area of India.
• Income from farming is the major source of money for farmers, hence the farmers ability to repay loans is dependent on farming income.
• In many cases of farmers, the failure of the crops makes it impossible for farmers to repay the loan.
• Even if banks are present in rural areas, it is difficult for the small farmers to obtain loans from banks because they need collateral against loans and require proper documentation.
• Collateral is an asset that the borrower owns such as livestocks, buildings, vehicles, deposits with banks) and uses this as a guarantee to a lender until the loan is repaid. Usually poor people or farmers may not have sufficient collateral to get loans from the banks.

b) What are the other sources from which the small farmers can borrow?

• It is easy for small farmers to get loans from informal sources, as they might know each other personally
• Small farmers in rural areas rely on informal sources of loans, such as money lenders.
• But the interest rates from informal lenders are very high, they keep no records of the transactions and harass the small farmers and small farmers end up in debt trap.
• Cooperative societies are the other major source of cheap credit in rural areas.
• These are formed to solve the problems associated with Informal sources of loans.
• Cooperatives are beneficial to members of low and middle income groups.
• The different types of cooperative societies are farmers cooperatives, weavers cooperatives, industrial workers cooperatives, Credit Cooperative Society, Consumer Cooperative Society, Producer Cooperative Society, Marketing Cooperative Society, Housing Cooperative Society.
• Krishak Cooperative is an example of cooperative.
• There are managing committees in cooperative societies, members are elected democratically.
• Audits are performed in cooperative societies, hence it is managed professionally.
• The Government of India recognizes cooperative societies as an independent body.

c) Explain with an example of how the terms of credit can be unfavourable for the small farmer

• In the informal sector, lenders can lend at whatever interest rate they choose. But informal lenders tend to charge very high rates of interest, which are higher than the banks.
• When the rate of interest is very high, there is a very high possibility of small farmers falling into a debt trap.
• In rural areas, the main demand for credit is for crop production.
• Crop production involves considerable costs on electricity, water, fertilisers, pesticides, seeds, repair of equipment, etc.
• There is a minimum stretch of three to four months between the time when the farmers sell their crops and when the farmers buy these inputs.
• Farmers usually repay the loan after harvest and take crop loans at the beginning of the season.
• Income from farming is the major source of money for farmers, hence the farmers ability to repay loans is dependent on farming income.
• Most loans from informal lenders do very little to increase the income of small farmers.
• Since the cost of borrowing is very high from informal sources of credit, a large part of the earnings of small farmers may likely be used to repay the loan.
• In certain cases, small farmers also could end up in a situation where the amount to be repaid is greater than the income.

d) Suggest some ways by which small farmers can get cheap credit.

• Co-operatives are the major source of cheap credit for farmers in rural areas.
• For cooperation in certain areas, members of the cooperatives pool their resources.
• Krishak Cooperative is one of the fine examples for cheap credit.
• Krishak Cooperative provides loans for agricultural trade, loans for cultivation, loans for purchase of agricultural implements etc.