Question

Mention the reasons for which the informal sources of credit are preferred in rural areas

Answer 1

Answer:Informal sources of credit are preferred in rural areas because people living there are poor and they have nothing to keep as collateral in banks so they take loans from money lenders who gives them loans without any collateral. In formal sources there is high rate of interest. Due to which people cant pay back.

Explanation:

Answer 2

Answer:

INFORMAL SOURCES:

• The credit from informal sources means getting loans from those insitutions which does not come under the preview of any legal entity. Informal sources mainly includes borrowing money from moneylenders , friends , relatives , traders and employers.

Following are the reasons for which the informal sources of credit are preferred in rural areas :

• Most of the informal sources of credit offer cheap rate of interest on loans as compared to formal sources of loans.
• For availing loans from formal sources that is banks where one needs collateral and require to fulfil their terms and formalities, which most of poor people lacks.
• Collateral is assets or physical assets owned by the borrower, such as a house, livestock, a vehicle, etc.  Against these assets, banks make loans to the borrower. The borrower uses the assets as collateral for a lender until the loan is repaid.
• Most of the people in rural areas don't have access to native bankers and other sources of financial income, this increases the share of informal sources of credit among the poor households.
• Requirement of documentation while taking loans from banks is also one of the major reason that why poor people prefer informal sources of loans. Most of poor people lack in documentations due to poor education system.

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