what is a debt trap and how is range de changing this?

While a small proportion of India is celebrating the GDP growth we’ve achieved.

The majority still is living as third world citizens.

The income gap and access to capital is huge in our country. And, so are repurcussions, many struggle with debt traps – especially in the unorganized sector.

What is a debt trap?

In simple words, a debt trap is a situation where you are borrowing more money to pay off previously borrowed sum.

Why does a debt trap creates big problems for the unorganised sector?

Let’s understand this from Harini and Ramya’s story.

Harini, a small business owner – is a self made woman who borrowed INR 2,00,000-/ from the local money lender and agreed to pay back INR 3,00,000-/

Ramaya, also a small business owner and a responsible girl is from the same village as Harini. Ramaya took over her mother’s fruit business and started working on expanding it.

Similar to Harini, Ramaya also took a loan of INR 2,00,000 but from the bank. Since her mother had a well established business, it was possible for Ramaya to raise capital from the bank at better interest than what the local money lender had to offer.

Another struggle which Harini would face was paying back the borrowed amount. Each time she would speak to the local lender, they would ask him to return the full amount or keep paying interest.

While Ramya could clear her loan using the Easy Monthly Installments scheme, Harini still is paying the interest on her borrowed amount as it is next to impossible for her to save a big amount of INR 2,00,000 and pay it off in one go.

And, now as the lender has asked Harini to return the money after two years.

Harini has no choice but to borrow again from some other local lender and this time she would need to borrow not just to pay off INR 2,00,000 but also for other expenses which she could not pay as most of her income would go towards paying the high interest which the previous money lender charged.

Harini is in a debt trap.

I have been silently following a startup which is changing accesibility to credit for the unorganised sector.

Rang De, founded by Smita and Ramakrisna, is a peer to peer lending platform running since 2008.

In my opinion, Range De is addressing a real problem which impacting the mango man of the country (instead of building for convenience, something I talked about here: https://lnkd.in/dz-bX3By)

While there are several micro financing units, what makes Rang De unique is their crowd sourcing approach and low interest rates.

Image source: Yourstory


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