Arnav was not able to get a loan from the bank as he lacked collateral. However, his neighbour lent him the required amount even without a collateral. If informal loans are readily available, then why are they not recommended?

Banks depend on loans for income.

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Informal loans have very high rates of interest.

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Informal loans lead to chances of harassment from borrowers.

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Informal loans have no records of transactions.

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Solution

The correct option is D Informal loans have no records of transactions.
People usually opt for informal credit if they lack collaterals, which are demanded by banks. However, moneylenders charge very high interest rates, keep no record of the transactions, and harass the poor borrowers. These are heavy burdens and can push borrowers into a debt trap. Therefore, borrowing from the informal sector is not recommended.

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