Why do rural borrowers depend on the informal sector for credit? What steps can be taken to encourage them to take loans from the formal sources? Explain any three.
Answers
Answer:The rural borrowers depend on the informal sector for credit because : (i) Absense of collateral and documentation. (ii) Flexible loans in term of timelines, interest rates, procedural requirements etc. ... Need to aware them regarding high rate of interest and debt traps made by such moneylenders.
Informal credit
Explanation:
Informal sources of credit are not regulated by the RBI. They are mainly given by the local money lenders and pawn brokers where no proper records of the transaction is maintained. Also, they charge a high interest rate for the loans. Sometimes they give loans without any collateral, which may lead to bonded labour. Informal credit is prevalent in rural areas and the poor are generally exploited by these lenders.
In order to avoid informal credit, government should take steps to create awareness among the people regarding bonded labour, debt trap and informal credits. Branches of banks should be expanded to cover all rural areas, so people can approach the banks for loan. People should be encouraged to maintain documents for ID Proof as validated by the government.