Q1. [3] deep thorough-understanding
Rama, an agricultural labourer, borrows from her landowner-employer at 5% per month to meet daily expenses. Arun, a medium farmer, borrows from a bank at 8.5% per annum for cultivation. Even though Arun's loan is larger in amount, why is Rama's credit arrangement far more burdensome for her? In your answer, refer to the terms of credit that make the two arrangements different.
Generated by claude-sonnet-4-6 · 2026-06-26 13:24 · grounding rag
Model Answer
Rama's credit arrangement is far more burdensome due to the following differences in terms of credit:
- Interest Rate: Rama pays 5% per month (60% per annum) to her landowner-employer, whereas Arun pays only 8.5% per annum to the bank — nearly seven times cheaper.
- Mode of Repayment: Rama repays by working for the landowner, which ties her labour to him. Arun can repay anytime within three years after harvest.
- Debt Trap: Rama must often take a fresh loan before repaying the old one, causing her debt to keep rising. Arun has a flexible repayment schedule.
- No Collateral/Formal Support: Rama has no assets to access formal credit; she is entirely dependent on her employer, who exploits this dependence.
Thus, high interest and exploitative conditions make Rama's informal credit far more burdensome than Arun's formal bank loan.
Source: Chapter 3 (Money and Credit), "Example of a Village" and "Formal Sector Credit in India"
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Explanation
- Examiners look for direct comparison using the term "terms of credit" — interest rate, collateral, repayment conditions, and mode of repayment.
- Always quantify the interest rate difference (5%/month vs 8.5%/year) — this is a striking contrast and earns marks.
- Mention the debt trap concept explicitly; it directly appears in the chapter.
- Keep the answer point-based for clarity — easier to score full marks this way in a 3-mark question.