Social Science (087) — AI-generated practice question

Poor rural households depend more on informal credit than rich households because:

1. Lack of collateral: Banks require collateral (assets as guarantee) for loans. Poor households usually have no assets to offer, so banks refuse them loans.

1. Limited bank presence: Banks are not present everywhere in rural India, making formal credit inaccessible to the poor.

1. Complex procedures: Bank loans require proper documents which poor borrowers often cannot provide.

1. Moneylenders' flexibility: Informal lenders know borrowers personally and give loans without collateral or documentation, making them the only accessible option for the poor — though they charge very high interest rates.

In contrast, rich households possess assets to offer as collateral, making them eligible for formal (cheaper) bank loans.

Source: Chapter 3 — Formal Sector Credit in India; Self-Help Groups for the Poor

---

Examiners expect three distinct reasons for 3 marks — each reason should be clear and brief. The key points are: no collateral → banks refuse, banks absent/inaccessible, and moneylenders are flexible but expensive. Avoid writing a long essay; just 3 focused points with a brief link to why rich households differ. Use textbook terms like "collateral," "formal/informal sources," and "terms of credit."