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Question
Manav needs a loan to set up a small business. On what basis will Manav decide whether to borrow from the bank or the moneylender? Discuss.
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Solution
Manav needs a loan to set up a small business. Manav will decide on whether to borrow from the bank or the moneylender on the basis of various factors. Firstly, he must have collateral or an asset which can guarantee his loan. If he lacks such an asset, Manav cannot get a loan from a bank. In this scenario, he will have to go to a moneylender, even though the latter charges a higher interest rate. Secondly, if Manav is not aware of the banes of borrowing from the informal sector, he might not even consider taking a bank loan. Thirdly, if there are no banks in or near his area of residence or work, then Manav will borrow from a moneylender.
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