“The rich households are availing cheap credit from formal lenders whereas the poor households have to pay a heavy price

Question

“There are some major differences between the way formal and informal credit providers operate in India. While the formal credit providers follow certain rules and regulations framed by government, informal credit providers do not follow such rules. When the borrower could not repay as per the agreed terms, formal credit providers cannot use any illegal ways to get back the credit, whereas informal credit providers use many coercive and illegal ways which at times lead to borrowers committing suicides.

Compared to the formal lenders, most of the informal lenders charge a much higher interest on loans. Banks and cooperative societies need to lend more. This would lead to higher incomes because many people could then borrow cheaply for a variety of different needs. They could grow crops, do business, set up small-scale industries etc. They could set up new industries or engage in business activity. Cheap and affordable credit for all is crucial for the country’s development.” 

“The rich households are availing cheap credit from formal lenders whereas the poor households have to pay a heavy price for borrowing from informal sources” – Comment in your own words.

Answer 1

The main reason behind poor house holds depends on informal lenders/sources because banks do not wish to give loans to the poor, who have no collateral. Bank loans require proper documents and collateral. Banks prefer not to lend money to the poor farmers and landless labourers, because more often than not they don’t have the required documents to take loan.

But rich people have more properties, they should submits proper documents to banks for loan.

According to this, rich people are benefited with low rate of interest but poor people are suffered with high rate of interest. So formal sector loans need to expand in rural areas for the development of poor.