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Why do the rural borrowers depend on the informal sector for credit? What steps can be taken to encourage them to take loans from the formal sources ? Explain any two.

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The rural borrowers depend on the informal sector for credit because :
(i) Absense of collateral and documentation with rural borrowers.
(ii) Flexible loans in term of timelines, interest rates, procedural requirements etc. are provided to rural borrowers by informal sectors.

Steps that can be adopted to encourage them to take loans from the formal sources are :
(i) Awareness among rural borrowers against the exploitation of informal sectors. Need to aware them regarding high rate of interest and debt traps made by such moneylenders.
(ii) Promotion to self-help groups. These groups collect their savings as per their own ability to save. Members can take small loans from the groups to meet their requirements. If the group is regular in savings for year or two, it can avail loan from the bank.

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