One of my uncles landed in a huge debt years ago because he borrowed some money from his neighbor to pay his children’s education. As per the village norms the monthly interest rate was extremely high and compounded too. But for a poor farmer that’s the only way to educate his sons and daughters. It may be quite expensive to borrow from a rich money lender but what is the only option? What banks charge is a peanut compared to what our farmers in the villages pay.
I heard compounded interest is illegal in our country. And that’s great news; we need such policies to protect our poor farmers from such exploitation. But the situation is different. It is the farmers who direly need money far more than the rich people’s need to lend them.
For instances people in my village use strange interest calculation method and the rate is 5% per month, which means it is 60% per annum. Now if you can afford to lend some money, you will be rich overnight. But at the same time we must look at the risk involved in such matters.
Let’s say PaSsu borrows Nu. 10,000 from me to buy a pair of oxen to plow his field and I charge him an interest of 5% per month. Then by a simple calculation PaSsu owes me:
By the end of 1 first year
Principal Amount: Nu. 10,000/-
Interest rate 5x12 = 60%p.a
Nu. 10000+6000 = 16000/-
By the second year - Nu. 25600/-
By the end of third year - Nu. 40960/-
By the end of fourth year - Nu. 65536/-
And by the end of fifth year- Nu.104857.60
Wow, isn’t that a lot of money?
But lets’ say PaSsu is a wise man and decides to avail a loan of Nu. 10,000 from BOB for 5 years at an interest rate of 15% per annum:
By simple interest calculation method:
PaSsu pays Nu 6000 as interest after 5 years and principal amount of Nu. 10,000/-Now you will think you will receive a lot of money if you lend it to farmers. But let me warn you, if you think you can lend them, be ready to lose half the amount. I am wise enough to refuse PaSsu’s need. That’s a joke by the way. But most rich people won’t lend you money.