Choose the most appropriate answer. Formal sources of credit do not include a) Banks. b) Cooperatives. c) Employers.

Answer: The correct answer is option (C) – Employers

  • The various types of loans can be conveniently grouped as formal sector loans and informal sector loans.
  • The informal sector loans are friends, relatives, employers, traders, money lenders etc.
  • Formal Sector Loans are loans from cooperatives and banks. 
  • The credit activities of lenders in the informal sector is not monitored by any organization. There is no organization to check the unfair methods used by lenders to get their money back.
  • In the informal sector, lenders can lend at whatever interest rate they choose.
  • Most loans from informal lenders do very little to increase the income of borrowers as they carry a very high interest rate.
  • Usually the poor have to depend on informal sources of credit and it is the richer households who receive formal credit.
  • The formal sources of credit only meet the credit needs of some people in rural areas.
  • When loans are taken from informal sources of credit, a larger part of the earnings of the borrowers is used to repay the loan, due to higher cost of borrowing.
  • In certain cases, the amount to be repaid is greater than the income of the borrower due to the high interest rate for borrowing.
  • Therefore many poor people may not be willing to take loans, to avoid falling into debt traps, thereby reducing the opportunities for expansion of the economy.
  • To make sure that the poor can benefit from the cheaper loans, it is important that the formal credit is distributed more equally.
  • Reserve Bank of India (RBI) makes sure that banks not only provide loans to traders and profit making businesses but also to small borrowers, small scale industries and small cultivators.
  • This monitoring done by the Reserve Bank of India (RBI) is necessary because for the development of the nation, cheap and affordable credit is a necessity.

Loans From Cooperatives

  • Cooperative societies are the other major source of cheap credit in rural areas.
  • For cooperation in certain areas, members of a cooperative pool their resources.
  • The different types of cooperative societies are farmers cooperatives, weavers cooperatives, industrial workers cooperatives, Credit Cooperative Society, Consumer Cooperative Society, Producer Cooperative Society, Marketing Cooperative Society, Housing Cooperative Society.
  • Krishak Cooperative is an example of cooperative.
  • Krishak Cooperative provides loans for loans for construction of houses, fishery loans,loans for agricultural trade and cultivation, loans for purchase of agricultural implements, and loans for a variety of other expenses. 
  • Krishak Cooperative has 2300 farmers as members.
  • Krishak Cooperative receives deposits from its members.
  • The Cooperative has obtained a large loan from the bank, with these deposits as collateral.
  • Loans to members are given from these funds.
  • Another round of lending can take place, once these loans are repaid.

Characteristics of Cooperative Societies

  1. The Government of India recognizes cooperative societies as an independent body.
  2. There are managing committees in cooperative societies, members are elected democratically.
  3. Audits are performed in cooperative societies, hence it is managed professionally.
  4. Its formation and participation of members is voluntary by nature.
  5. It is mutually beneficial to members of low and middle income groups.
  6. Reduced financial risk.

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