Question

Majority of the credit needs of the _________________households are met from informal sources.

Answer 1

Answer: The correct answer is poor households

The various types of loans can be conveniently grouped as formal sector loans and informal sector loans. The sources of formal Sector Loans are cooperatives and banks. The sources of informal sector loans are friends, relatives, employers, traders, money lenders etc.

Informal Sources of Loans – Major Problem for Poor Households

• There are no organisations monitoring the informal sources of credit.
• In the informal sector, lenders can lend at whatever interest rate they choose. But informal lenders tend to charge very high rates of interest, which are higher than the banks.
• Hence there is a possibility that informal lenders could end up harassing poor people if the required amount is not paid back at the right time.
• There is no organization to check the unfair methods used by lenders to get their money back.
• Usually the poor have to depend on informal sources of credit and it is the richer households who receive formal credit.
• When the rate of interest is very high, there is a very high possibility of poor people falling into a debt trap.
• Most loans from informal lenders do very little to increase the income of borrowers as they carry a very high interest rate.
• Since the cost of borrowing is very high from informal sources of credit, a large part of the earnings of poor people may likely be used to repay the loan.
• In certain cases, poor households also could end up in a situation where the amount to be repaid is greater than the income.
• 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.
• Cheap and affordable credit is a necessity if a nation has to grow in the path of development.

Solutions for Poor Households – Loans From Cooperatives

• Cooperatives are beneficial to members of low and middle income groups.
• Cooperative societies are the other major source of cheap credit in rural areas.
• These are formed to solve the problems associated with Informal sources of loans.
• 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.
• There are managing committees in cooperative societies, members are elected democratically.
• Audits are performed in cooperative societies, hence it is managed professionally.
• The Government of India recognizes cooperative societies as an independent body.

Solution for Poor Households – Self Help Groups

• Self Help Group (SHG) will become eligible for availing loans from the banks, provided the Self Help Group is regular in savings for a span of one or two years.
• In Self Help Groups (SHG), the members will collect or pool their savings.
• To meet the needs of the Members of Self Help Group, they can take small loans from the group itself.
• The interest on the loans charged by the group will be lesser than interest rates charged by moneylenders.
• About the loans to be granted, the group decides on repayment schedule, the amount, interest to be charged, purpose etc.
• Group members are responsible for taking most of the important decisions regarding the loan activities and savings.