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Q.

Which of the following is NOT the reason why poor households depend on informal sources of credit?


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a

Banks are not present everywhere in rural areas.

b

Loans from banks require collateral, whereas informal sources are willing to lend without it.

c

Moneylender can approach informal sources without paying earlier loans.

d

Informal sources charge a lower rate of interest. 

answer is D.

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Detailed Solution

Informal sources charging a lower rate of interest is not the reason why poor households depend on informal sources of credit.
Poor households still depend on informal sources of credit, and there can be several reasons for that.
1)      The presence of banks in rural areas is less when compared in urban areas. However, in the past few decades, a few public sector banks have also started opening their branches in rural areas.
2)      The loan procedure of banks is difficult, and it is comparatively easier to borrow from moneylenders as they don't follow any fixed procedure.
3)      The banks require proper collateral and several documents, but the same is not with informal creditors.
4)      The borrowers can approach the moneylenders even without paying the previous loans.
 
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