What are the various sources of credit in rural areas? Which one of them is the most dominant source of credit and why?

In rural areas, there are both informal sources like moneylenders, traders, relatives etc. and formal sources of credit like commercial banks and cooperative societies.

Informal sources are dominant:

1. Banks are not common in rural areas.

2. If banks are present, it is difficult for the poor to meet the requirements of documents and collateral for a loan.

3. But informal moneylenders give loans without collateral because they know each other personally.

4. The lenders can even approach moneylenders for more money without repaying the previous loan. But usually, moneylenders only exploit the poor with high-interest rates.

Note: Rural India comprises mainly of poor households. They are usually unaware of the benefits of the formal source of credit or unable to get it due to lack of resources. So, they get exploited by the informal sector.