You asked: Why do the poor prefer informal sector credit?

Why poor people choose informal loans?

Banks are not present everywhere in rural India. … 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.

Why do rural poor take informal credit?

Poor people in rural areas are still dependent on informal credit sources such as the moneylenders who charge an exorbitant rate of interest on the given loans. It is because banks are not present in far-off villages in rural India. Further, taking a loan from a bank is much difficult due to extensive paper work.

Why do the rural poor depend on informal sector loans?

The rural borrowers depend on the informal sector for credit because : (i) Absense of collateral and documentation with rural borrowers. (ii) Flexible loans in term of timelines, interest rates, procedural requirements etc. … Members can take small loans from the groups to meet their requirements.

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Why do people prefer the informal sector?

Some people are self-employed in the informal sector because they want to avoid registration and taxation. … Firstly, much of the informal economy contributes greatly to the formal economy. Secondly, women constitute the majority of precarious, under-paid, informal workers.

Why is informal credit bad?

Most of the informal lenders charge a much higher interest on loans. Thus the cost to the borrower of the informal loans is much higher. … The high rate of interest of borrowing can mean that the amount to be repaid is greater than the income of the borrower and it can lead to increasing debt and debt-trap.

What is the importance of informal sector credit?

The loan obtained from money lenders, relatives and friends, etc. constitutes the ‘informal sector’ of credit. They can lend money at any rate of interest and adopt any means to recover back their money.

What are the advantages of informal sources of credit?

If the underlying social capital is sufficiently large, we show that informal loans carry lower interest rate and collateral than formal loans, including the possibility of zero interest and collateral. This makes informal credit a priori more attractive to borrowers.

Which is the main source of credit for the poor give one reason?

Majority of the credit needs of poor households are met from informal sources. Poor households often get exploited with higher interest from money lenders. Poor households borrow money from money lenders because they don’t have any form of security (collateral) as requested by the formal sources of credit.

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Why is it important to increase formal credit in rural areas examine ways in which this can be done?

There is need to expand formal sources of credit in India as: (i)This would lead to higher incomes and many people could then borrow cheaply for a variety of needs. (ii)They could grow crops, do business, set up small-scale industries etc. (iii)They could set up new industries or trade in goods.