Economics

On what terms did Savita get a loan from Tejpal Singh? Would Savita's condition be different if she could get a loan from the bank at a low rate of interest?


SOLUTION

Savita, a small farmer, in order to cultivate wheat on her 1 hectare of land, decides to borrow money from Tejpal Singh a large farmer on the following terms:

  • (i) Tejpal Singh agrees to give Savita the loan at an interest rate of 24 percent for four months which is a very high-interest rate. Savita also has to promise to work in his field as a farm labourer during the harvest season at Rs. 35 per day.  
  • (ii) The rate of interest charged by Tejpal Singh was higher than that of banks. If Savita had taken the loan from the bank, interest would have been lower and she could have easily repaid the loan and her condition would have been far better.

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