Had this thought midway through this morning’s “social entrepreneurship” class. What kind of interest rates are applicable for microcredit?
On one hand, farmers are typically poor people and can’t afford to borrow money at high rates. Hence rate of interest should be much lower than that for the urban/middle class counterparts. This is just like Public Distribution System where the poor are given essential commodities at low prices.
On the other hand, going by pure financial basis, the inherent risk in lending to farmers is really high since the probability of repayment is low. Hence, the credit spread charged should be high and these people should pay a higher rate of interest. Another argument supporting it is that the traditional moneylenders usually charge insane rates (sometimes over 100% per annum) and in this scenario, an interest rate of 25-30% per annum from a commercial bank shouldn’t be a problem for the farmers.