Sunita's Two Buffaloes: Choosing Between Three Kinds of Credit
Sunita keeps two cows in a village near Meerut and wants to buy two buffaloes for ₹40,000. Her milk income will begin only about four months after purchase. She has three offers. A local moneylender will lend the full amount at 5 per cent per month, with no papers and repayment 'whenever the milk money comes'. The district bank will lend at 7 per cent per year under a Kisan Credit Card, but it wants land records, a photograph and a guarantor, and says sanction takes about three weeks. A milk cooperative's self-help group will lend at 1 per cent per month; it meets every week, asks each member to save ₹200 a week, and decides loans by a vote of its twelve members. Sunita's neighbour borrowed ₹30,000 from the moneylender last year, paid ₹9,000 in interest over six months, and had to sell a cow. Sunita can repay the principal after six months. She asks the village schoolteacher which offer she should accept and why.
1. Calculate the simple interest on ₹40,000 for six months under each offer, rank them, and check whether the neighbour's experience is consistent with the moneylender's rate.
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Work each rate onto the same six-month period, which is the only fair comparison.
- Moneylender: 5% per month × 6 months = 30%. Interest = 40,000 × 30 ÷ 100 = ₹12,000. Total repayment ₹52,000.
- Self-help group: 1% per month × 6 = 6%. Interest = 40,000 × 6 ÷ 100 = ₹2,400. Total ₹42,400.
- Bank: 7% per year, so 7 × 6 ÷ 12 = 3.5%. Interest = 40,000 × 3.5 ÷ 100 = ₹1,400. Total ₹41,400.
Ranking from cheapest: bank, then self-help group, then moneylender. The moneylender costs ₹10,600 more than the bank - nearly a quarter of the principal - for the same money over the same period. The neighbour's case checks out: ₹30,000 at 5% a month for six months is 30%, that is ₹9,000, exactly what she paid. The consistency matters, because it shows the village figure was not a one-off disaster but the routine price of informal credit.
2. Interest is only one term of credit. Compare the three offers on the other terms and recommend one, explaining why a borrower might sometimes reject the cheapest.
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The three offers differ on collateral, paperwork, speed, repayment flexibility and risk. The bank is cheapest but needs land records, a guarantor and about three weeks - usable only if Sunita holds the papers and can wait before buying the animals. The self-help group needs no land title, lends quickly, but asks ₹200 a week in savings (about ₹800 a month) on top of repayment, which competes with the same milk income. The moneylender is fast, paperless and infinitely flexible about timing, and that flexibility is exactly what is being sold at 30% for six months - with the neighbour's cow as the warning of what happens when the milk money is late. A borrower may reject the cheapest option when documentation or delay makes it unusable, or when the loan is too small to justify the paperwork. Recommendation: the bank if the land records and guarantor are in place; otherwise the self-help group, whose 1% a month is manageable and whose weekly meeting enforces discipline; avoid the moneylender, because the real cost is not the interest but the risk of losing the animals that were bought to earn the income.
3. How does the self-help group improve Sunita's position beyond offering a lower rate? Give two mechanisms and one limitation.
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Two mechanisms go beyond price. First, the loan rests on a peer guarantee rather than collateral, so a woman without land in her own name can borrow at all - this is the single biggest difference from the bank for a small dairy household. Second, the weekly meeting produces information and early warning: the group sees a repayment problem in week two, not in month six, and can reschedule before the borrower sells an asset; the ₹200 weekly saving also builds a small fund of her own, which reduces her dependence on the moneylender for the next emergency. A third, quieter effect is that a member votes on loans, so she is a decision-maker rather than a supplicant. The limitation should be stated honestly: group loans are usually small and short-term, the weekly discipline can turn into social pressure on a member who falls ill, and one member's default can freeze credit for all twelve. The reasoning to show is that cheaper credit works only when the borrower can actually reach it and survive its repayment rhythm.