How can rural poor be encouraged to take loans from the formal sectors of credit? Explain.

Rural poor depends more on the informal source of credit due to lack of awareness and ease of availability. There are steps that can encourage them to take loans from the formal sectors. The major steps are discussed below:

Bring awareness

Make aware to rural poor that formal source of credit can be obtained with much lower interest rate than the informal sources. They must also be aware of the debt trap they are facing, and the exploitation done by the informal source lenders.


Establishing the cooperative banks in all the rural areas will help the rural poor to get rid of the informal source lenders as there will be more options for taking a loan. The employees in the bank must be sensitized to deal with a poor, uneducated rural person.


Promoting more number of Self Help Groups (SHGs) which will promote the rural poor to save the money by depositing it weekly and when the SHGs are registered, they will be aware of the formal source of credit. Members of the SHGs should also take an initiative to bring awareness about the formal source of credit throughout the village.

Imposing law

A law must be enacted to control the informal sources of credit via money lenders. Those money lenders who lend money for higher interest must be punished under the law.

Terms of credit

The interest rate, collateral, documents required and mode of repayment altogether comprises of terms of credit. The terms of credit for advancing a loan from the banks should not be very rigid. The documents required must be such that the rural poor can afford it.