Credit and Debt in India

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Questions and Answers

What is a debt trap?

A debt trap is a situation where a loan is difficult or impossible to repay, mainly due to high interest.

Which of the following are terms of credit?

Method of payment (correct)

Rate of interest (correct)

Duration of credit (correct)

Collateral (correct)

All of the above (correct)

Collateral is a guarantee given by the lender to the borrower.

False

What does the lender have the right to do if the borrower fails to repay a loan?

The lender has the right to sell the collateral asset to recover the loan amount. Signup and view all the answers

What are the advantages of formal lending?

Formal lending provides transparency, regulation, and a lower interest rate. It also helps in promoting financial inclusion and economic development. Signup and view all the answers

The informal sector is well regulated and provides lower interest rates.

False Signup and view all the answers

What does the Reserve Bank of India supervise to ensure fairness?

The Reserve Bank of India supervises the functioning of formal sources of loans. Signup and view all the answers

The informal sector can lend at whatever interest rate they choose.

True Signup and view all the answers

What is the drawback of informal lenders?

Informal lenders often charge exorbitant interest rates, leaving borrowers vulnerable to debt traps. They also lack accessibility, making it difficult for borrowers to access affordable credit. Signup and view all the answers

What are the important benefits of self-help groups (SHGs)?

Self-help groups promote collective savings, provide micro-loans for members, and help overcome the problem of lack of collateral. Signup and view all the answers

SHGs have more than 100 members.

False Signup and view all the answers

What happens if a SHG member fails to repay a loan?

Other members of the group can pay for their share because of the trust and mutual support within the group. Signup and view all the answers

What are some of the key reasons for the growth of formal sources of credit in India?

Formal sources of credit are expanding in India because of the need for access to affordable credit by individuals and businesses, particularly in rural areas, for development and economic growth. Signup and view all the answers

What are some of the reasons why banks and cooperative societies should lend more in India?

Banks and cooperative societies need to lend more to promote financial inclusion, support small-scale enterprises, particularly in rural areas, and contribute to economic growth. Signup and view all the answers

Study Notes

Debt Trap

Debt trap is a situation in which a loan is difficult or impossible to repay, it is mainly caused due to high interest.

Terms of Credit

Terms of credit is a set of conditions under which a loan is given. It may include method of payment, rate of interest, duration of credit and other related conditions.
Collateral (security) is an asset. But the borrower owns such as land, vehicle etc and uses this as a guarantee to a lender until the loan is repaid.
If the borrower fails to repay the loan, the lender has the right to sell the asset or collateral to recover the loan.

Credit sources in India

Formal sector
- loans from banks and cooperatives
- RBI supervises the functioning of formal sources of loans.
- RBI says that the banks give loans not just to profit-making business and traders but also to small cultivators, small-scale industry to small borrowers etc.
- Banks periodically submit information to the RBI on how much they are lending, to whom, at what interest rate, etc.
Informal sector
- The informal lenders include money-lenders, traders, employers, relatives
- There is no organization which supervises the credit activities of lenders in the informal sector.
- They can lend at whatever interest rate they choose.
- The cost to the borrower of informal loans is much higher as no record of the transactions is kept and poor one housed.
- There is no one to stop them from unfair means to get their money back.

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Description

Explore the concepts of debt traps and terms of credit within the context of India. This quiz covers the implications of high-interest loans and the role of collateral in borrowing. Understand the various sources of credit and the oversight provided by the RBI.