question_answer

  What are the two main reasons for formal credit not being available to the rural poor? Why is there a need to expand rural credit? Or Why do the rural borrowers depend on the informal sector of credit? What steps can be taken to encourage them to take loans from the formal sources? Explain any two.

Answer:

                  The main reasons for formal credit not being available to the rural poor, due to which they are dependent on informal credit sources are (i) Lack of documents of employment, earnings, etc to convince banks that they will be able to repay the loan. (ii) They usually lack any property which can act as collateral or security against loan default. There is a need to expand rural credit so that the rural borrowers are encouraged to take loans from formal sources because (i) Rural borrowers depend on informal sources like moneylenders who charge them high rates of interest, which can sometimes land them into a debt-trap. (ii) It will lead to higher incomes and development of the country.