Page 76 - Understanding Economics for Class 10

4. Low rate of interest is charged on the High rate of interest is charged on the
loans given under this sector. loans given under this sector.
5. It is the Rich households who are Poor have to depend on informal
availing cheap credit from formal sources.
Goyal Brothers Prakashan
lenders.

2. Why should credit at reasonable rates be available for all?
Ans. High cost of borrowing discouraged those who might want to start a new business. Credit at
reasonable rates be available for all, this would result in higher earnings and many people
could then borrow cheaply for a variety of needs like for growing crops, doing business,
setting up a small-scale industry etc. They could set up new industries or trade in goods.
For the country’s development cheap and affordable credit is crucial.

3. Should there be a supervisor, such as the Reserve Bank of India, that looks into the loan
activities of informal lenders? Why would its task be quite difficult?
Ans. Yes, there should be a supervisor, that looks into the loan activities of informal lenders.
This task is quite difficult because informal lenders include moneylenders, friends, relatives,
traders etc. these people are scattered and are not registered with the government. Apart
from lending, they are involved in their own business. Keeping a check on them is difficult.

4. Why do you think that the share of formal sector credit is higher for the richer households
compared to the poorer households?
Ans. The share of formal sector credit is higher for the richer households compared to the poorer
households because richer people have better capacity to repay loan on time. Moreover, credit
from formal sources require collateral and documentation, which poor people cannot offer.

seLf-heLP grouPs for the Poor
 Proper documents and collateral are also required to take loan from the bank.
 Since poor does not have any collateral to offer, it is one of the major reasons which
prevents the poor from getting bank loans.
 On the other hand, Informal lenders such as moneylenders give a loan without collateral
because they personally know the borrowers.
 Even without repaying the previous loan, the borrowers, if required, can approach the
moneylenders.
 However, a very high interest rate is charged by moneylenders, no records are maintained
of the transactions and poor borrowers are harassed by money lenders.
 In recent years, a new approach has been implemented to provide loans to the poor,
particularly in rural areas. This involves organizing small Self Help Groups (SHGs)
comprised mainly of women, who pool their savings.
 With 15-20 members in each group, regular meetings and savings (varies from `25 to
` 100 or more per member) take place, allowing members to borrow small loans from
the group for their needs.
 The interest charged by the group is lower than that of moneylenders.
 After consistent savings (a year or two), the SHGs become eligible for loans from banks,
which are used to create self-employment opportunities for members. The group is collectively
responsible for loan repayment, and non-repayment cases are taken seriously.
Economics Class X E-67