Rukmini's Sewing Machine: Comparing Terms of Credit
Rukmini, a tailor in Gaya, needs ₹30,000 to buy a second sewing machine and cloth for a school-uniform order due in eight weeks. She has three offers. A local moneylender will give the money the same day at 5% per month, with no receipt, and will accept repayment in weekly instalments collected at her shop. A public-sector bank branch will lend at 11% per annum, but the loan file needs a guarantor, a land document and about three weeks for sanction; the branch manager says a Kisan Credit Card is not applicable to her. A women's self-help group in her lane lends to members at 1% per month after six months of regular saving of ₹100 per week and group approval; the group meets every Tuesday and insists that loans be used for the stated purpose. Rukmini has ₹6,000 in savings and no collateral in her own name. The uniform order will pay ₹48,000 after delivery, but the school may delay payment by a month.
1. Calculate the interest cost of ₹30,000 for eight weeks under the moneylender and the SHG. Which is cheaper, and by how much?
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Moneylender. 5% per month for 8 weeks ≈ 2 months. Interest = 30,000 × 0.05 × 2 = ₹3,000. Total repayment ≈ ₹33,000. If calculated as 56 days, it is about ₹2,800, but the monthly convention is the standard exam calculation.
SHG. 1% per month for 2 months. Interest = 30,000 × 0.01 × 2 = ₹600. Total repayment ≈ ₹30,600. Difference = ₹2,400.
Bank, for comparison. 11% per annum for 2 months = 30,000 × 0.11 × 2/12 = ₹550, plus processing fees, but the three-week sanction delay may make it unusable for an eight-week order.
Conclusion. The SHG is cheaper than the moneylender by about ₹2,400 on this loan. But the SHG's six-month saving requirement means she cannot get the loan today unless she is already a member. The comparison of interest alone is therefore not enough; eligibility and timing decide the choice.
2. The bank loan has the lowest annual interest rate. Explain why Rukmini may still not choose it, using the idea of 'terms of credit' rather than only the interest rate.
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Terms of credit means the whole package: interest rate, collateral, documentation, repayment schedule, time taken to sanction, flexibility and the method of recovery.
Bank. Lowest interest (about ₹550 for two months) but she lacks collateral in her name, needs a guarantor, and must wait three weeks. With an eight-week delivery deadline, a three-week delay could lose the ₹48,000 order. Processing fees and fixed instalments add to the real cost.
Moneylender. Same-day cash, weekly collection at her shop, no paperwork - but 5% a month, no receipt, and recovery methods that can be coercive. The effective annual rate is about 60%.
SHG. 1% a month and group support, but six months of saving, weekly meetings, group approval and purpose restrictions. It is cheap but not immediately available.
Reasoning. A rational borrower compares effective cost including delay, not just the nominal rate. If the order is certain, the moneylender may still be rational for a short period; but the risk of no receipt and coercive recovery makes it dangerous. The SHG is best if she can join and wait; the bank is best only if the order can be delayed or the sanction is fast.
3. Suppose Rukmini joins the SHG today. Identify the cash-flow problem she faces and suggest one practical way the group or a bank could solve it without pushing her to the moneylender.
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Cash-flow problem. The order pays ₹48,000 after delivery, but she must spend ₹30,000 now, and the school may pay a month late. Her own savings are ₹6,000; the SHG's six-month rule means no loan today. So she faces a timing gap, not a solvency problem.
Practical solutions.
- SHG bridge loan from the group corpus. If she joins and saves, the group can lend from its own funds against her savings and group guarantee, often in weeks rather than months.
- SHG–bank linkage. The bank lends to the group, and the group on-lends to Rukmini. This uses the group's social collateral instead of her missing land title.
- Supplier credit or advance. She can ask the sewing-machine dealer for instalments, or ask the school for a 30% advance against the order.
Reasoning. The solution must match the gap: small, short-term, and secured by the order or group guarantee. A long-term bank loan with collateral does not fit; the moneylender fits the timing but at a cost that may eat the profit. The best option is a group-based bridge loan plus a written payment schedule with the school.