Economics (NCERT) Notes

3.3 Formal Sector Credit in India

Loans distribution according to economic status

• Poor people are more dependent on informal loans.

• Around 85 per cent of the loans taken by poor households in the urban areas are from informal sources.

• In the rich urban household, only 10 per cent of their loans are from informal sources, while 90 per cent are from formal sources.

• 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.


Reasons for not lending by banks in rural areas

• Banks are not present everywhere in rural India.

• The procedures for getting a loan from a bank is much more difficult than taking a loan from informal sources.

• Bank loans require proper documents and collaterals which poor people don’t have.

• Informal sectors loans can be without collaterals and documents since the lenders know them personally.


Steps to improve loan availability

• Cheap and affordable credit is crucial for the country’s development.

• 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.

• It is important that the formal credit is distributed more equally so that the poor can benefit from the cheaper loans.


Self Help Groups (SHGs)

• A typical SHG has 15-20 members, usually belonging to one neighbourhood, who meet and 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.

• 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.

• The SHG is responsible for the repayment of the loan.


Benefits of SHGs

• It help borrowers get loan without collateral.

• They can get timely loans for a variety of purposes and at a reasonable interest rate.

• It helps vulnerable sections of the society like women to become financially self-reliant.

• The SHG meetings of the group provide a platform to discuss and act on a variety of social issues such as health, nutrition, domestic violence, etc.


Grameen Bank of Bangladesh

• It 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.

• Professor Muhammad Yunus, the founder of Grameen Bank, received the 2006 Nobel Prize for Peace.

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