Question

What are the reasons why the banks might not be willing to lend to certain borrowers?

Answer 1

There are multiple reasons behind the unwillingness of banks to lend to certain borrowers. Some of these reasons are mentioned below:

• Banks do not have their presence in all the places in rural India.
• Even if banks are present in rural areas, it is very difficult for poor people to borrow from banks when compared to borrowing money from informal sources. Informal lenders might know the borrower personally, hence they might give the loan without any need for collateral.
• Bank loans require collateral and proper documentation.
• In rural areas, the main demand for credit is for crop production.
• Crop production involves considerable costs on electricity, water, fertilizers, pesticides, seeds, repair of equipment, etc.
• There is a minimum stretch of three to four months between the time when the farmers sell their crops and when the farmers buy these inputs.
• Farmers usually repay the loan after harvest and take crop loans at the beginning of the season. Income from farming is the major source of money for farmers, hence the farmer's ability to repay loans is dependent on farming income.
• Banks need collateral (security) against loans. Collateral is an asset that the borrower owns such as livestock, buildings, vehicles, and deposits with banks) and uses this as a guarantee to a lender until the loan is repaid. Usually, poor people or farmers may not have sufficient collateral to get loans from the banks.