Why are poor households still dependent on informal sources of credit?

cbse
money-and-credit
cbse-class-10
cbse-class-10-social
economy

#1

Why are poor households still dependent on informal sources of credit?

Answer:
Reasons:

  • Banks are not present everywhere in rural India.
  • Even if they are present, getting a loan from a bank is much more difficult than taking a loan
    from informal sources.
  • Bank loans require proper documents and a collateral. Absence of collateral is one of the major reasons which prevents the poor from getting bank loans.
  • Informal lenders like moneylenders know the borrower personally and hence, are often willing to give a loan without a collateral.
  • The borrowers can, if necessary, approach the moneylender even without repaying their earlier loans.
  • However, the moneylenders charge very high rates of interest, keep no records of the transactions and harass the poor borrowers.