Drawbacks of informal sources of credit and Chit fund Explained

Drawbacks of informal sources of credit

  • Most of the informal lenders charge a much higher interest on loans.
  • Thus the cost to the borrower of the informal loans is much higher.
  • Higher cost of borrowing means a larger part of earning of the borrowers is used to repay the loan and they have less income left for themselves.
  • The high rate of interest of borrowing can mean that the amount to be repaid is greater than the income of the borrower and it can lead to increasing debt and debt-trap.
  • People who might wish to start an enterprise by borrowing may not do so because of the high cost of borrowing.

What according to you can reduce the dependence of the poor households on informal sources of credit?

  • The poor households in rural India is bound to lead a very hard life.
  • The reason is that they don’t have their own land or any property with them.
  • They work as landless labourers in the field of big farmers.
  • Whenever they need money, they seek the help of moneylenders, who charge much higher interest on loans.
  • Higher cost of borrowing means a larger part of earning of the borrowers is used to repay
  • the loan and they have less income left for themselves.
  • This dependence of theirs can be reduced only when the following steps will be taken:

(i) Education should be spread in rural areas.

(ii) The government should assist them in improving their condition.

(iii) Poor people belonging to rural areas should be made self-sufficient so that

they may have a decent life


  • It is a situation in which a person takes a loan and due to unavoidable circumstances he is not able to repay his loan.
  • Now faces a difficult situation and has to take a tough decision , either he has to borrow a fresh loan or sell some part of his property to repay the earlier loan.

Chit fund

  • Chit fund mean a fund set up for collection of small savings of the people who earn on daily basic like chaiwala, panwala etc .
  • These people can save rupees 10 and rupees 100 on daily basis and deposit in the fund .
  • The money collected in invested in the shares or debentures of the companies or in the government bonds the return earned on these investment paid back to the investors after deducting the administrative charges of managing the funds .

Grameen Bank of 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, now has over 6 million borrowers in about 40,000 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 was the founder of Grameen Bank ,and recipient of 2006 Nobel Prize for peace.
Professor Muhammad Yunus
Professor Muhammad Yunus
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