10. What is meant by Informal Sources of Credit? Mention the drawbacks of this system.
(3)
:
11. "The credit activities of the informal sector should be discouraged." Support the
statement with arguments. (3)
12. "Whether credit would be useful or not, it depends on the situation". Give two
different examples in support of this statement. (3)
13. Credit has its own unique role for development'. Justify the statements with
argument. (3)
14. How would you describe the organization and functioning of Self Help Group? (5)
15. What is debt trap? Why is it more rampant in rural areas? Give reasons. (5)
9. Name'the system in which double coincidence of wants is essential feature. (1)
Answers
10. The sources of credit which are brought out by our family relatives ,money lenders , friends or any acquaintance means which are not mentioned by the government ,those are called the Informal Sources of Credit . Drawbacks or it's Limitations: ° These have a large interest rate as compared to formal sources.
11. The credit activities of the informal sector should be discouraged because:
85% of loans taken by the poor households in the urban areas are from informal sources.
Informal lenders charge very high interest on their loans.
They try to charge more and more interest on their loans.
There are no boundaries and restrictions.
Higher cost of borrowing means a larger part of the earnings of the borrowers is used to repay the loan.
In certain cases, the high interest rate for borrowing can mean that the amount to be repaid is greater than the income of the borrower.
This could lead to increasing debt and debt trap, therefore the credit activities of the informal sector should be discouraged.
12. The examples are based on the risks in the situation and whether there is some support in case of loss.
The examples are
(i) A manufacturer taking credit for supplying goods in the festival season usually has low risk, as the products are most likely to be sold completely.
(ii) A small farmer taking credit for crops has larger risks in case of crop failure. His only support in case of loss is the land, which he has to sell.
Thus, it can be concluded that usefulness of credit depends on the situation.
13. Crop production involves cost of seeds, fertilizers, pesticides, water, electricity, repair of equipments. Cheap credit would thus lead to increase in production. Even tertiary sector needs loans to buy the latest equipments and technology. Thus, we can say that credit has a unique role in the development of a country.
14. SELF Help Group are small groups of 15-20 members of rural people in particular women belonging to one neighbouhood who meet and saves regularly. The members of the group can take small loan to meet their needs on low interest rate.
Functioning:
Most of the decisions regarding the savings and loan activities are taken by the group members.
The group decides as regards the loans to be granted- the purpose, amount, interest to be
charged, repayment schedule etc.
Group is responsible for the repayment of the loan.
Any case of non-repayment of loan, by any one member is followed up seriously by other members in the group.
The SHG help borrowers overcome the problem of collateral.
They provide timely loans for a variety of purposes and at a reasonable interest rate.
The group provides a platform to discuss and act on a variety of social issues such as health, nutrition, domestic violence, etc.
15. Debt-trap is a situation in which a person after taking a loan is not able to pay back the loan.
It is more common in rural areas because
(i) A borrower repays a loan by selling the agricultural produce, which sometimes may not be enough to repay the loan.
(ii) Rural borrowers normally depend on informal sources of credit who charge a high rate of interest. This repayment of larger amounts may sometimes be larger than their income.
Thus, it can be concluded that loans from banks always help to raise people’s earning capacity.
9. Barter system
In a barter system where goods are directly exchanged without the use of money, double coincidence of wants is an essential feature.
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