A government employee with a steady salary and a migrant labourer in the city both need loans. Why is the government employee far more likely to receive a bank loan than the migrant labourer, even if both need the same amount? What does this difference reveal about who benefits from formal credit in India?
Generated by claude-sonnet-4-6 · 2026-06-26 13:26 · grounding rag
Model Answer
Banks require collateral (an asset as security) and proof of steady income before granting loans. A government employee has a fixed salary, a stable job, and can offer assets as collateral, making repayment certain in the bank's view. A migrant labourer has irregular income, no fixed address, and no collateral to offer, so banks consider them too risky to lend to.
This difference reveals that formal credit in India largely benefits the rich and well-off, while the poor are pushed toward informal moneylenders who charge very high interest rates, increasing debt burden and the risk of a debt trap.
Source: Chapter 3 — Formal and Informal Credit: Who gets what?
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Explanation
- The key concept here is terms of credit: collateral, income stability, and documentation. Banks need assurance of repayment.
- The examiner wants you to link the individual example to the larger pattern: richer households access formal credit; poorer households are forced into expensive informal credit.
- Mentioning collateral explicitly earns a mark. Mentioning the consequence (debt trap / high-cost borrowing) earns another. The third mark is for identifying the inequality in formal credit distribution.
- Avoid vague phrases like "banks don't trust poor people" — use precise terms: collateral, irregular income, formal sector, informal sector.