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.