Question

why are poor households still dependent on informal sources of credit? explain 4 reasons.

Answer 1

(i) Banks are not present everywhere in rural India.

(ii) Even when they are present, getting a loan from a bank is much more difficult than taking a loan from informal sources.

(iii) Bank loans require proper documents and a collateral. Absence of collateral is one of the major reasons which prevents the poor from getting bank lo

(iv) Informal lenders like moneylenders, know the borrower personally and hence, are often willing to give a loan without a collateral.

(v) The borrowers can, if necessary, approach the moneylender even without repaying their earlier lo

(vi) However, the moneylenders charge very high rates of interest keep no records of the transactions and harass the poor borrowers.

Answer 2

Answer:

Poor households are still dependent on informal sources of credit due to the following reasons -

• Banks are not present everywhere in rural India. Even when they are present, getting  loan from bank is much more difficult than taking a loan from informal sources.
• Bank loans require proper documents and collateral which poor people in India cannot produce to the bank.
• Informal lenders such as moneylenders know the borrowers personally and hence are often wiling to give a loan without collateral.
• The borrowers can approach the moneylenders even without repaying their previous loans.
• Banks do not sanction any loan to the borrowers if they have not cleared the previous loans.