Credit in the Financial System

Commercial banks

Commercial banks are formal sources of credit. Step 1: Formal sources include banks, cooperative societies, and government institutions. Step 2: They are regulated by RBI and follow government rules and regulations. Step 3: They offer loans at relatively lower interest rates compared to informal sources. Step 4: Money lenders, relatives, and landlords are informal sources that are not regulated by any authority.

30%

In 2003, moneylenders provided 30% of rural credit in India. Step 1: This shows that informal sources still play a major role in rural credit. Step 2: Moneylenders charge very high interest rates compared to formal sources. Step 3: Commercial banks provided 25% and cooperative societies 27% of rural credit. Step 4: The high dependence on moneylenders indicates limited access to formal credit for rural households.

They fall into a debt trap

When farmers cannot repay loans due to crop failure, they fall into a debt trap. Step 1: The debt grows larger with accumulated interest over time. Step 2: Farmers may need to take fresh loans to meet basic needs or for next season's cultivation. Step 3: They might be forced to sell part of their land to repay debts. Step 4: This cycle makes their financial situation worse rather than better, creating a debt trap situation.

15-20 members

A typical SHG has 15-20 members, usually women from the same neighborhood. Step 1: This size allows for effective group management and decision-making. Step 2: Members meet regularly and pool their savings together. Step 3: The group can provide small loans to members from their collective savings. Step 4: After establishing a good savings record, the group becomes eligible for bank loans.