Read the following situation and answer the questions that follow:
Rama is a landless agricultural labourer in a village. There are several months in the year when she has no work. She depends on her employer — a medium landowner — for loans to meet daily expenses and for emergencies like sudden illness or family functions. The landowner charges an interest rate of 5 per cent per month. Rama repays the money by working for him. Most of the time, Rama has to take a fresh loan before the previous one is repaid. Though the landowner does not treat her well, she continues to work for him because she has no other source of credit.
(i) Why is Rama unable to access credit from formal sources such as banks? (1 mark)
(ii) At 5 per cent per month, what is the annual rate of interest Rama pays? How does this compare with the typical bank loan rate for a farmer? (1 mark)
(iii) Explain how Rama's situation illustrates the concept of a debt trap. (2 marks)
Generated by claude-sonnet-4-6 · 2026-06-26 13:24 · grounding rag
Model Answer
(i) Rama is landless and has no collateral (asset to offer as security). Banks require proper documents and collateral before sanctioning loans. Since Rama cannot provide these, she is unable to access formal credit.
(ii) Annual rate = 5% × 12 = 60% per annum. This is far higher than the typical bank loan rate for farmers, which is around 8.5% per annum (as seen in Arun's case in Sonpur).
(iii) A debt trap is a situation where a borrower is unable to repay a loan and is forced to borrow again, causing debt to keep rising. Rama earns irregularly and must borrow for daily expenses before repaying the previous loan. Because of the high interest rate (60% p.a.), repayment is very difficult. Fresh loans are taken before old ones are cleared, leaving her permanently indebted to the landowner with no way to escape.
Source: Chapter 3 — Money and Credit, Variety of Credit Arrangements / Formal Sector Credit in India
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Explanation
- (i) The key phrase examiners look for is "no collateral" — that is the primary reason banks reject poor borrowers.
- (ii) Always show the calculation (5 × 12 = 60%). Compare directly with Arun's 8.5% — that figure is from the passage and makes the contrast concrete.
- (iii) For 2 marks, you need: define debt trap + apply it to Rama's case with at least two specific details (irregular income, high interest, fresh loan before old repaid). Avoid vague statements; use evidence from the passage.