Detailed Summary of Formal and Informal Credit
The section on Formal and Informal Credit explores two primary types of credit systems that people can access in daily life. It discusses:
Key Points:
- Definition of Credit: Credit is defined as an agreement in which a lender supplies money, goods, or services to a borrower with a promise of future payment, which can significantly impact economic activity.
- Sources of Credit: Credit can be sourced from formal (banks, cooperatives) or informal sectors (moneylenders, relatives). The majority of rural households still rely on informal sources, which often impose high-interest rates.
- Requirements for Borrowers: Formal credits often require collateral and extensive documentation, making it challenging for the poor to obtain loans. In contrast, informal lenders may not require such terms but typically charge higher rates.
- Impact of Differential Access: The section illustrates the disparity in credit access, highlighting how rich households can more easily secure formal loans while poorer households remain trapped in informal arrangements.
- Self-Help Groups (SHGs): It describes SHGs as a viable solution to provide access to credit, helping low-income individuals, especially women, to save and borrow collectively. SHGs empower individuals with financial independence and allow the pooling of resources for better loan terms.
- Importance of Cheap Credit for Development: Finally, it emphasizes the need for expanding formal credit sources to reduce dependency on costly informal loans, especially among poorer segments of the population.
The section connects the importance of credit arrangements to economic development, urging for more inclusive financial practices.