FORMAL AND INFORMAL CREDIT –WHO GETS WHAT?
Importance of formal and informal sectors in urban areas
Poor households-85% from informal sector &15% from formal.
Households with few assets-53% from informal &47% from formal.
Well-off households-28% from informal & 72% from formal.
Rich households-10% from informal &91% from formal.
**This shows that rich households are availing cheap credit from formal lenders whereas the poor households have to pay price for borrowing.
**All this suggests that the formal sector still meets only about half of the total credit needs of the rural people & remaining are met by the informal sector.
**Similar pattern is also seen in the rural areas.
Q.Why does formal sector need to lend more?
1.As most loans from informal lenders carry a very high rate of interest and do little to increase the income of the borrowers. Thus it is necessary that the banks and cooperatives increase their lending particularly in the rural areas, so that the dependence on informal sources of credit reduces.
2.While formal sector loans need to expand, it is also very necessary that everyone receives these loans. At present it is the richer households who receive formal credit whereas the poor have to depend on the informal sources. It is important that the formal credit is distributed more equally so that the poor can benefit from the cheaper loans.
Q. Why do you think that share of formal sector is higher for the richer households compared to the poorer household?
This is mainly because rich people have collaterals and therefore they can easily fulfil the requirements of documentations.
Q. Why are poor households still dependent on the informal sources of credit?
There are several reasons for it as;
1.Banks are not present every where in rural India.
2.Even when they are present, getting loan from them is much more difficult than taking a loan from informal sources, as they require proper documents and collateral.
3. Informal lenders know the borrowers personally and hence are often willing to give a loan with collateral, & the borrowers can, if necessary, approach the lender even without repaying their earlier loans.
In the recent years people have tried new ways of providing loans to the poor.
The idea is to organize rural poor, in particular women into small Self Help Groups and pool their savings.
Q.What is an SHG?
A typical SHG has 15-20 members usually belonging to a neighbourhood, who meet and save regularly.
--Saving per month varies from 25-100 rupees or more depending upon the ability of the people.
--Members take small loans from group itself to meet their needs.
--The group charges interest but it is still less than what a moneylender charges.
--After year or two if the group is regular it becomes eligible for availing loans form the banks. Loan is sanctioned in the name of the group and is meant to create self employment opputunities for all its members.
--Loans are provided for releasing mortgaged land, for meeting working capital needs as buying seeds,fertilizers,raw materials, for acquiring assets like sewing machine, handlooms, cattle, etc.
--Important decisions regarding the savings, loan activities are taken by the group members.
The group decides –the purpose, amount, interest to be charged, repayment schedule etc.
Non repayment is taken seriously, because ofthis feature of repayment banks are willing to lend loan especially to women when organized in SHG.even when they have no collateral as such.
Q.Why SHG’s are becoming popular?
SHG’s are becoming popular for the following reasons:
1.They help borrowers overcome the problem of lack of collateral.
2.They can get timely loans for variety of purposes and at a reasonable interest rate.
3. They are building blocks of the organization of the poor.
4. It helps women to become self-reliant.
5.The regular meetings of the group provide a platform to discuss and act on various social issues as health, nutrition, domestic violence, etc.
Q Analyse the role of credit for development?
Credit plays a very positive & crucial role in the development.
--It helps in self-development and self-reliance.
--It helps in growth and expansion of industries and business.
--It boosts production capacity of economy and in turn leads to capital formation.
--It also helps in speeding the process of industrialization.