Money and Credit-3 Flashcards
types of loans based on sources
formal and informal loans
what are formal and informal loans
formal loans are the loans from banks and cooperatives,
informal loans are the loans from moneylenders, traders,employers and relatives etc.
explain the role of reserve bank of india in supervision
The Reserve Bank of India
supervises the functioning of formal
sources of loans. For instance, we
have seen that the banks maintain a
minimum cash balance out of the
deposits they receive. The RBI
monitors the banks in actually
maintaining cash balance. Similarly, he RBI sees that the banks give loans
not just to profit-making businesses
and traders but also to small
cultivators, small scale industries, to
small borrowers etc. Periodically,
banks have to submit information to
the RBI on how much they are
lending, to whom, at what interest
rate, etc.
is there anyone to check informal sources of loan
There is no organisation which
supervises the credit activities of
lenders in the informal sector. They
can lend at whatever interest rate they choose. There is no one to stop them from using unfair means to get their
money back
compare the interest rates in formal and informal loans
Compared to the formal lenders,
most of the informal lenders charge a
much higher interest on loans. Thus,
the cost to the borrower of informal
loans is much higher.
Higher cost of borrowing means a
larger part of the earnings of the
borrowers is used to repay the loan.
Hence, borrowers have less income
left for themselves. In certain
cases, the high interest rate for
borrowing can mean that the amount
to be repaid is greater than the
income of the borrower. This could
lead to increasing debt and debt trap. Also,
people who might wish to start an
enterprise by borrowing may not do
so because of the high cost of
borrowing.
cheap and affordable credit is crucial for country’s development. explain
banks and
cooperative societies need to lend
more. This would lead
to higher incomes
and many people
could then borrow
cheaply for a variety
of needs. They
could grow crops, do
business, set up
small-scale industries
etc. They could set up
new industries or
trade in goods. Cheap
and affordable credit
is crucial for the
country’s development.
what should the banks do soon?
-First,
the formal sector still meets only about
half of the total credit needs of the
rural people. The remaining credit
needs are met from informal sources.Most loans from informal lenders
carry a very high interest rate and do
little to increase the income of the
borrowers. Thus, it is necessary
that banks and cooperatives
increase their lending particularly
in the rural areas, so that the
dependence on informal sources
of credit reduces.
ii)Secondly, while formal sector
loans need to expand, it is also
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.
why do most poor people still take informal credit?
i)Banks are not
present everywhere in rural India.
ii)Even when they are present, getting a
loan from a bank is much more
difficult than taking a loan from
informal sources.
ii)bank loans require proper
documents and collateral. Absence of
collateral is one of the major reasons
which prevents the poor from getting
bank loans. Informal lenders such as
moneylenders, on the other hand,
know the borrowers personally and
hence are often willing to give a
loan without collateral.
iv) The borrowers
can, if necessary, approach the
moneylenders even without repaying
their earlier loans. However, the
moneylenders charge very high rates
of interest, keep no records of the
transactions and harass the poor
borrowers
explain the working of an self-help group
The idea is to
organise rural poor, in particular
women, into small Self Help Groups
(SHGs) and pool (collect) their
savings. A typical SHG has 15-20
members, usually belonging to one
neighbourhood, who meet and save
regularly. Saving per member varies
from Rs 25 to Rs 100 or more,
depending on the ability of the people
to save. Members can take small loans
from the group itself to meet their
needs. The group charges interest on
these loans but this is still less than
what the moneylender charges
can self-help groups take loans from bank? how?
After
a year or two, if the group is regular
in savings, it becomes eligible for
availing loan from the bank.
Loan is sanctioned in the
name of the group and is
meant to create selfemployment opportunities
for the members. For
instance, small loans are
provided to the members for
releasing mortgaged land,
for meeting working capital
needs (e.g. buying seeds,
fertilisers, raw materials
like bamboo and cloth), for
housing materials, for
acquiring assets like sewing
machine, handlooms, cattle,
etc.
how are decisions taken in shgs
Most of the important
decisions regarding the
savings and loan activities
are taken by the group
members. The group
decides as regards the loans to be granted — the purpose, amount,
interest to be charged, repayment
schedule etc.
why do banks provide loans to shg
it is the group
which is responsible for the repayment
of the loan. Any case of nonrepayment of loan by any one
member is followed up seriously by
other members in the group. Because
of this feature, banks are willing to
lend to the poor women when
organised in SHGs, even though they
have no collateral as such
what are the main advantage given by the shg
the SHGs help borrowers
overcome the problem of lack of
collateral. They can get timely loans
for a variety of purposes and at a
reasonable interest rate. Moreover,
SHGs are the building blocks of
organisation of the rural poor. Not
only does it help women to become
financially self-reliant, the regular
meetings of the group provide a
platform to discuss and act on a
variety of social issues such as health,
nutrition, domestic violence, etc.
Explain grameen banks in bangladesh
Grameen Bank of Bangladesh is one of the
biggest success stories in reaching the poor to
meet their credit needs at reasonable rates.
Started in the 1970s as a small project,
Grameen Bank in October 2014 has over 8.63
million members in about 81,390 villages spread
across Bangladesh. Almost all of the borrowers
are women and belong to poorest sections of
the society. These borrowers have proved that
not only are poor women reliable borrowers, but
that they can start and run a variety of small
income-generating activities successfully
