FESTIVAL SEASON

FESTIVAL SEASON

Two Different Credit Situations

A large number of transactions in our day-to-day activities involve credit in some form or the other. Credit (loan) refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payment. Let us see how credit works through the following two examples.

1. Festival season

2. Swapna’s Problem

Festival season

It is festival season two months from now and the shoe manufacturer, Salim, has received an order from a large trader in town for 3,000 pairs of shoes to be delivered in a month's time. To complete production on time, Salim has to hire a few more workers for stitching and pasting work. He has to purchase raw materials. To meet these expenses, Salim obtains loans from two sources.

1. He asks the leather supplier to supply leather now and promises to pay him later.

2. He obtains a loan in cash from the large trader as an advance payment for 1000 pairs of shoes with a promise to deliver the whole order by the end of the month.

At the end of the month, Salim is able to deliver the order, make a good profit, and repay the money that he had borrowed.

In this case, Salim obtains credit to meet the working capital needs of production. The credit helps him to meet the ongoing expenses of production, complete production on time, and thereby increase his earnings. Credit, therefore, plays a vital and positive role in this situation.

Let’s work these out

Supposing Salim continues to get orders from traders. What would be his position after 6 years?

Source: This topic is taken from NCERT TEXTBOOK

SWAPNA’S PROBLEM

SWAPNA’S PROBLEM

Swapna, a small farmer, grows groundnut on her three acres of land. She takes a loan from the moneylender to meet the expenses of cultivation, hoping that her harvest would help repay the loan. Midway through the season, the crop is hit by pests and the crop fails.  Though Swapna sprays her crops with expensive pesticides, it makes little difference. She is unable to repay the moneylender and the debt grows over the year into a large amount. Next year, Swapna takes a fresh loan for cultivation. It is a normal crop this year. But the earnings are not enough to cover the old loan.

She is caught in debt. She has to sell a part of the land to pay off the debt

In rural areas, the main demand for credit is for crop production. Crop production involves considerable costs on seeds, fertilizers, 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.

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 a 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 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.

Let’s work these out

1.  Fill the following table.

2.  What are the reasons that make Swapna’s situation so risky? Discuss factors – pesticides; the role of moneylenders; climate

Source: This topic is taken from NCERT TEXTBOOK