Why do people take more loans from informal sector
Answers
(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:
Two facets of urban informal credit markets (ICMs) have been recognized by various authors one, that informal credit largely serves differing needs of low income households; and two, that under the circumstances in which current credit markets function, informal suppliers are at a disadvantage and/or have several shortcomings. This is compounded by commercial banks who do not find the urban poor viable or "bankable." Various approaches have been attempted, from promulgation of targeted credit programmes for the low income households, to active legislation that has attempted to curb the functioning of ICM suppliers. Ultimately, this has only adversely affected credit availability for the urban poor. The basic premise that this paper stands on is that the ICM plays an important and beneficial role, complementing and not contradicting the credit delivery networks of commercial banks. The paper lists 14 features of the ICM that has enabled it to effectively reach the urban poor, and draws implications for microcredit programmes that are targeted at such groups.
Explanation: