Social Science (087) — AI-generated practice question

Richer households have greater access to formal sector credit due to the following reasons:

1. Collateral: Formal sector loans (banks/cooperatives) require collateral as security. Rich households own assets like land, property, or vehicles which they can offer, while poor households lack such assets.

1. Documents: Banks demand proper documents (income proof, identity proof, etc.). Richer people can provide these easily, whereas the poor often cannot.

1. Creditworthiness: Banks prefer borrowers with higher income and repayment capacity, as they are less likely to default.

As a result, the poor depend on informal sources like moneylenders who charge very high interest rates (up to 5% per month), often pushing them into debt traps.

Source: Chapter 3 — Money and Credit, "Self-Help Groups for the Poor" and "Formal and Informal Credit: Who gets what?"

---

• Examiners expect 3 distinct reasons for a 3-mark question — one point per mark.
• The key points are: lack of collateral, lack of documents, and lower income/creditworthiness of the poor.
• Always link back to the consequence (dependence on informal credit) to show full understanding.
• Avoid writing a long essay — keep it tight and point-based for full marks.