(a) Why might banks be unwilling to lend to small farmers? (b) What are the other sources from which the small farmers can borrow?

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 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) Banks might be unwilling to lend to small farmers because small farmers usually lack proper documents and collateral or asset.

(b) The other sources from which the small farmers can borrow are moneylenders, relatives or friends, self-help groups and cooperative banks.

(c) The terms of credit can be unfavourable for the small farmer if he has a bad crop, and is forced to either surrender his collateral (if he borrowed from a bank) or sell *** a part of his land (if he borrowed from the informal sector), in order to repay his loan.

(d) Self-help groups and cooperative banks do not require collateral as a guarantee; hence, they can provide cheap credit to the small farmers.