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

Several distinct sources of credit exist in rural areas, and they can be categorized into formal and informal sources:

1. Cooperative Societies: These are formal sources of credit, where members pool resources to aid each other. Examples include Farmers’ Cooperatives and Weavers’ Cooperatives. They offer affordable loans to their members, and the repaid loans are used to issue new ones.

2. Commercial Banks: Also a formal source of credit, banks provide loans to rural households. However, due to the stringent requirement of proper documentation and collateral, not all rural households can access these loans.

3. Agricultural Traders, Relatives, and Friends: These constitute informal sources of credit. Farmers may borrow from agricultural traders who supply necessary farming inputs on credit. The loans are then repaid after the harvest season.

4. Moneylenders: This is another informal source of credit that doesn’t require collateral, hence making them more accessible to most rural households.

Among these sources, the most dominant source of credit in rural areas is moneylenders. They are the most popular because of their convenience and the fact that they don’t require collateral. However, this easy access comes at a high cost, with moneylenders often charging exorbitant interest rates. Despite the financial risks involved, their flexibility and lack of formal requirements have made them the most commonly used source of credit in rural areas.