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.

(a) Banks might be unwilling to lend to small farmers because they usually cannot offer collateral security. Also, their income is highly uncertain.

(b) Small farmers usually borrow from relatives, friends, employer or local money lenders.

(c) The terms of credit can be unfavourable for the small farmer as they have to pay a very high interest rate, repayment period is less and their business is highly uncertain. For example, if a farmer borrows Rs 50,000 from a money lender at an interest rate of 5% per month, he will have to pay back Rs 15000 interest money and Rs 50000 principal at the end of 6th month. If his crop fails, he will still have to pay Rs 65000 to the money lender.

(d) Following are the ways by which small farmers can get cheaper credit:

1. Borrowing from Self Help Groups.
2. Borrowing from Cooperative societies.