Why in India majority of the poor people end up borrowing from informal source of credit instead of formal? Write some probable reasons.
Answers
Poor households still depend on informal sources of credit because: Bank loans require proper documentation and collateral which is rarely available with poor households. Informal sources of credit such as moneylenders know the borrowers personally and are often willing to give a loan without a collateral.
Explanation:
Abstract:
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.
Keywords:
informal credit, microcredit, slums and squatter settlements, developing countries, India, policy and programme development,