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Trapped in Tradition: A Look at Conventional Rural Lending in India

In the rural tapestry of heartland India, you will find the humble dwelling of Ram Prasad, a tenacious farmer with a gleaming hope in his eyes.

Ram, like many others in his village, harbours a dream to buy a tractor, to better irrigate his crops, and to ensure a more comfortable life for his family. But to turn these dreams into reality, he requires financial aid.

A loan seems the obvious choice. Yet, this seemingly simple task is mired in challenges that Ram, and countless others like him, face daily.

Let's embark on this journey with Ram, exploring the trials of a first-time borrower in rural India.

The Unending Pursuit of Collateral

Ram dreams of buying a tractor to expedite his work and increase his yield. For this, he needs a loan. However, the first stumbling block he hits is the lack of collateral. Most rural loans require assets that can be liquidated in case of loan default, typically land or valuable jewellery. Based on surveys conducted by the National Sample Survey Organization, they show that only 2.9% of total loans in rural India were secured with land as collateral.

Ram Prasad's land has been disputed between his relatives. The gold, passed down through generations, barely amounts to anything, making his pursuit seem like an endless struggle.

Deciphering the Documentation

Collateral aside, Ram Prasad finds himself facing the monumental challenge of paperwork. Banks require an array of documents to process a loan. First, there's the identity proof. Ram Prasad owns a voter ID but not the PAN card, which banks prefer.

Proof of income is another critical document. Formal institutions need evidence of steady income, which is challenging for a farmer whose income is seasonal and often depends on unpredictable factors like weather and crop health.

Then, there's the land ownership documents. In a country where land ownership disputes are rampant and legal battles run for generations, Ram Prasad, too, faces similar disputes. His land documents are contested by his distant relatives, making them practically useless for his loan process.

The Ghost of Credit History

Being a first-time borrower, Ram Prasad lacks a credit history. He has never availed of any formal credit, hence no transaction records, no previous repayments, or delays - essentially a blank slate. Unfortunately, in the world of lending, a blank slate is often worse than a bad one. It makes lenders apprehensive, tagging Ram Prasad as a high-risk client.

An Arduous Journey to the Bank

The geographical distance to the bank adds another layer of hardship. The nearest one is a few hours away by foot, with only one ramshackle bus making a trip in the early morning. Given his farming duties, it's difficult for Ram Prasad to spare an entire day for a bank visit. The bank's limited working hours and the long queue of fellow villagers needing services further impede the process.

A Devil's Bargain with Moneylenders

The bank's daunting procedures push Ram Prasad towards local moneylenders. They offer easy, fast loans with no paperwork. However, this convenience comes at a sinister cost - exploitative interest rates- sometimes as high as 5% per day. Borrowing from them means getting caught in a vortex of perpetual debt. However, in the face of mounting pressure and urgency, Ram Prasad sees it as his only option.

The Financial Literacy Gap

Ram Prasad, like many in his village, has received minimal education. He struggles to understand the intricacies of interest rates, loan tenure, repayment conditions, or penalties. Financial jargon sounds like a foreign language, making it difficult for him to comprehend loan terms or negotiate better conditions.

Encountering Dismissive Attitudes

Even as Ram Prasad attempts to decipher the world of lending, he grapples with the condescending and dismissive attitudes of bank officials. These officials, swamped with their work and disinterested in going the extra mile, often shoo away illiterate farmers, perpetuating their reliance on unscrupulous moneylenders.

Ram Prasad's struggles are not unique; they echo in the lives of millions of farmers in rural India. Each barrier he faces is a testament to the myriad challenges ingrained within the formal financial system. His story illustrates the urgent need for empathetic, inclusive, and contextually aware financial practices that can ensure his and many others' dreams don't remain just that, dreams.

Rang De way of lending

At Rang De, the journey of a first-time borrower is not marred by the traditional roadblocks. Instead, it's a road to financial agency and empowerment.

We understand the predicament of farmers like Ram who, in the absence of credit history, are often deemed 'risky'. We break this stereotyping by facilitating first-time loans through peer to peer lending, thereby enabling borrowers to build their credit scores.

It's a progressive step towards financial inclusion that allows hard-working individuals like Ram to have an equal chance at improving their lives.

Moreover, Rang De goes a step further by providing borrowers with the necessary financial literacy. We believe that credit alone is not enough; individuals must understand how credit works and how to manage it wisely. By teaching farmers about the implications of borrowing, the concept of interest rates, repayment schedules, and the repercussions of defaulting, Rang De ensures that they are prepared to handle their finances effectively.

One unique approach of Rang De is our ethical lending policy. We make sure not to overburden the borrower with loans beyond their capacity to repay. Our team conducts thorough due diligence to evaluate the borrower's actual needs and repayment abilities before sanctioning a loan. This approach safeguards the borrower from entering a cycle of debt and prevents them from economic exploitation.

In essence, Rang De is changing the narrative of rural borrowing in India.

By Investing in rural Indians through Rang De you can make a world of difference.

Join hands with Rang De Social Investors because everyone deserves a chance to transform his dreams into reality.

Invest in a fellow Indian and enable a first-time borrower today!

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