Which one of the following options describe “Collateral’?

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Asset as a guarantee for a loan

answer is D.

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Detailed Solution

Asset as a guarantee for a loan describes “Collateral’.
Collateral is an asset kept with the lender as a guarantee for the loan he provides. Formal sector institutions lend money to borrowers only with the condition of collateral. Commercial banks and cooperatives never lend money without collateral. They keep reasonable interest rates to lend money for productive purposes. But, moneylenders and traders lend to small farmers even without collateral which attracts borrowers. These moneylenders and traders charge high interest on loans and exploit small farmers and labourers. The borrowers face a debt trap due to the high-interest demands. Sometimes, the interest gets so high that it even exceeds the principal.

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