Formal And Informal Credit: Who Gets What?

• The people are divided into four groups, from poor to rich.
• 85 per cent of the loans taken by poor households in the urban areas are from informal sources.

Rural credit

• Compare this with the rich urban households.
• Only 10 per cent of their loans are from informal sources, while 90 per cent are from formal sources.
• A similar pattern is also found in rural areas.
• The rich households are availing cheap credit from formal lenders whereas the poor households have to pay a heavy price for borrowing.
• 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 area, so that the dependence on informal sources of credit reduces.
• 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 the informal sources.

SELF-HELP GROUP FOR THE POOR:

• Atypical self help group can have 15 to 20 members usually belonging to the same village.
• The main motive of self help group is to pool the savings of the poor people.
• Saving per member can vary from Rs. 25 to Rs. 100 or more depending on the ability of the people and the strength of the group.
• The self help groups provide loans to their members at a reasonable rate.
• After a year or two, if the group is regular in savings, it becomes eligible for bank loans.
• Loan is sanctioned in the name of the group with the main motive to create self employment opportunities for the members.
• In the recent years, many commercial and cooperative banks have provided loan to these self help groups for releasing mortgaged land, for meeting working capital needs, for housing materials, for acquiring assets like sewing machines, handlooms, cattle etc.
• Most of the self help groups work in a democratic way i.e., it is the group which decides regarding the loans to be granted, interest to be charged, schedule etc.
• A case of non-repayment of loan by any member is followed up seriously by other members in the group and because of this feature the commercial banks don't hesitate to lend loans to these groups.
• The most important feature of self help groups is that most of these groups are being organized by women. These are helping 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, dowry, domestic violence, child marriage etc.

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, Grameen Bank 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.