Question

Why do informal sectors charge interest rate at their work own risk

Answer 1

the following are the reasons behind high interest rates charged by the informal sectors.​

(i) Absence of regulatory bodies- Since there is no regulatory bodies that is monitoring the operations of the informal credit sources, hence, individual moneylenders operates on theri own and charges interest rates as per their wish.
(ii) No Paper work and documentations required- There is no paper work and doucmentations required while credit is forwarded. Also, there is no collateral or security required, hence, the risk involved is very high. Thus, the interest rate is high.
(iii) Last resort- The moneylenders know it very well that the borrowers approach informal credit sources as the last resort. Hence, due to this inability, the moneylenders take the undue advantage of the same by forwarding credit at high interest rate.
(iv) Low scope- Moneylenders operate at a low scale, i.e. they don't have a huge number of borrowers as compared to the formal sources. Hence, there is a less scope of making credit-forwarding a profitable venue for the moneylenders. Therefore, the need to charge high interest rate is required.