Money and Credit — Two Different Credit Situations

🔎 What is Credit?

Credit (loan) = a lender provides money/goods/services to a borrower in exchange for a promise of future payment.

👞 Salim receives an order for 3,000 pairs of shoes (1 month deadline).
👷‍♂️ He must hire extra workers and buy raw materials.
💼 Credit sources:
- 🧥 Supplier credit: leather on pay-later terms.
- 💰 Trader’s advance: cash loan against 1,000 pairs as advance.
📦 He completes the order, earns a profit, and repays both loans.

Why useful? Credit financed production costs on time → timely delivery → higher earnings ✅

🌱 Swapna (3 acres, groundnut) borrows from a moneylender for cultivation.
🪲 Pest attack → crop failure; expensive pesticides don’t help.
💸 She can’t repay; the debt balloons over a year.
🔁 Next season she borrows again; average crop, but income insufficient to clear past debt.
🧾 Forced to sell part of her land to repay.

Debt Trap: Borrowing to repay old loans → cyclical debt → difficult to recover.

Inputs: seeds, fertilisers, pesticides, water, electricity, repairs, etc.
⏳ 3–4 month gap between spending (sowing) and revenue (harvest).
🧮 Loans are taken at the start of season and repaid after harvest; repayment depends on farm income.
📌 Whether credit helps or hurts depends on risks and available support in case of loss.

Borrower’s asset (e.g., land, building, vehicle, livestock, bank deposits) kept as guarantee.
If borrower defaults, lender may sell collateral to recover dues.

Needs seasonal loans for 1.5 acres.
Earlier: moneylender at 5% per month (= ~60% p.a.).
Now: trader at 3% per month + condition to sell crop to him at harvest.
📉 After harvest prices are low; trader buys cheap, sells later at higher price → ensures repayment + profit.

Owns 7 acres; gets a bank loan at 8.5% p.a., repayable within 3 years.
Repays part after harvest; stores potatoes in cold storage.
Uses cold storage receipt as collateral to take a new bank loan (facility for crop-loan customers).

Farm labourer; unemployed for months; borrows for daily needs/medical/family events.
Depends on employer-landowner at 1% per month.
Repays by working for him; often needs new loans before repaying old; currently owes ₹5,000.
Stays despite poor treatment because the landowner is the only credit source for landless people.

2,300 farmers are members; they make deposits.
Co-op takes a large bank loan using deposits as collateral → on-lends to members.
Loan types: implements, agri-trade, fishery, house construction, etc.
When loans are repaid → new round of lending begins.

Only about half of rural credit needs are met by the formal sector.
Why informal? Collateral/docs/time barriers, fewer banks in villages, need for quick credit.
🔁 Policy direction: Expand & equalise formal credit; banks/co-ops must lend more in rural areas and make loans available to everyone.

Source	Share (%)
Moneylenders	33
Commercial Banks	25
Cooperative Society/Banks	25
Relatives & Friends	8
Other Institutional Agencies	5
Other Non-Institutional Agencies	2
Government	1
Landlords	1

Note: Greater wealth/assets → higher access to formal credit; poorer households rely more on informal sources.