CBSE · Class 10 · Social Science · Economics: Money and CreditWhy are poor households still dependent on informal sources of credit?

Poor households are dependent on informal sources because banks are not present everywhere in rural areas, and getting a loan from a bank requires proper documentation, formal paperwork, and collateral. Most poor people lack collateral assets to pledge against bank loans. In contrast, informal lenders like local moneylenders know the borrowers personally, provide loans without any collateral, and are easily accessible at any time of emergency, despite charging exorbitant interest rates.