Why do poor people opt for informal sources of credit?
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(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.
(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.
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1
Banks do not exist throughout in provincial India. Even if they exist, receiving a loan from a bank is much more complicated than taking a loan from unofficial sources.
Bank mortgages demand proper records and collateral. The inadequacy of collateral is one of the important causes which precludes the poor from obtaining bank loans.
Informal bankers like moneylenders know the borrower individually and hence, are oftentimes prepared to give a loan without collateral.
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