Informal Borrowing and Lending in Rural Finance Essay

2975 Words Jun 2nd, 2012 12 Pages


This paper presents an assessment of informal borrowing and lending in rural finance with a focus on its advantages and disadvantages. It examines a number of issues related to the functioning of rural credit markets, determinants of rural interest rates, why the government intervenes in rural credit markets and how.

BACKGROUND Commercial banks and other formal institutions fail to take care of the credit needs of peasants, however, mainly due to their lending terms and conditions. It is generally the rules and regulations of these formal financial institutions that have created the myth that the poor are not bankable, and since they can’t afford the
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The borrower and lender must know each other. The borrower probably knows the lender either as an employer or through family connections. He further stressed that the importance of the latter factor mainly arises due to the fact that a majority of borrowers have no tangible assets to offer as security to their lenders. In addition, these borrowers have no access to the professional moneylenders. A serious weakness with Basu’s argument, however, is that in modern day practice, professional moneylenders can advance loans to anybody. For instance, they can advance loans to those who can offer some land or jewellery as collateral. Subsequently, as rural borrowers increasingly have better access to institutional credit agencies, the importance of these professional moneylenders tend to decline.

ADVANTAGES AND DISADVANTAGES OF INFORMAL MARKETS There are many advantages of informal credit which make it attractive to the poor as against formal finance. Merchant (2011) in his article, discusses a diverse number of factors. He maintains that the personal relationship and proximity existent between these borrowers and lenders remain the main strengths of this market. This aids easy access to credit and speedy operations.
He points out that this factor explains the low cost of transaction existent in rural markets. The direct interactions between borrowers and lenders

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