Social Science (087) — AI-generated practice question

Collateral is an asset (like land, building, or bank deposits) that a borrower uses as a guarantee against a loan.

(i) Richer households own valuable assets such as land and property, which they can offer as collateral. Banks are therefore willing to lend to them at low interest rates through formal channels.

(ii) Poor households lack such assets, so they cannot meet the collateral requirement of banks. As a result, they are forced to approach informal lenders like moneylenders, who lend without collateral but charge very high interest rates, increasing the debt burden on the poor.

Source: Chapter 3 — Terms of Credit; Self-Help Groups for the Poor; Formal and Informal Credit: Who Gets What

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• The examiner expects you to define collateral briefly, then address both parts clearly — this is a two-part logical explanation.
• The key causal chain is: no collateral → no formal loan → forced to informal lenders → higher interest rates. State this chain explicitly.
• Back up with textbook evidence: "Absence of collateral is one of the major reasons which prevents the poor from getting bank loans" — this direct textbook line shows you've read the source carefully.
• Don't just list facts; show the link between collateral and access to credit type.