Discuss the role of cooperative in formal sector lending.
Answers
Rural population in India normally borrows money from money lenders at higher rates of interest.
Rural people seek money lenders(Informal source of credit) due to limited expansion of credit by the formal sectors in the rural areas.
Formal sectors in India are mostly urban biased and increasing their presence in the rural areas will reduce the dependence of rural people on the informal sector.
Money lenders (Informal sector source) lending system is unregulated, unlike formal sector
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=> Lending groups and credit cooperatives have the potential to provide affordable credit to small-scale farmers because they can reduce transaction costs and lower the risk of default. In developing countries these two kinds of lending arrangements have a mixed record, although their difficulties reflect shortcomings in implementation rather than in the lending arrangements themselves. The article indicates that successful group lending schemes work well with groups that are homogeneous and jointly liable for defaults. The practice of denying credit to all group members in case of default is the most effective and least costly way of enforcing joint liability. Another way to encourage members to repay is to require mandatory deposits that are reimbursed only when all borrowers repay their loans. The article points out that credit cooperatives that mobilize savings deposits are less dependent on external sources and increase the borrowers' incentive to repay. The success of credit cooperatives requires training of members as well as management. Experience suggests that credit cooperatives should not expand their activities beyond financial intermediation until they develop strong institutional and managerial capabilities