Social Science — CBSE Class 10 board question

Collateral is an asset that the borrower owns (such as land, building, vehicle, livestock, or bank deposits) and uses as a guarantee to the lender until the loan is repaid. If the borrower fails to repay, the lender has the right to sell the collateral to recover the money.

Why it prevents the poor from getting bank loans:

1. Lack of assets: Poor people usually do not own property like land or buildings to offer as collateral. Without it, banks refuse to sanction loans.
2. Strict bank requirements: Banks require proper documents and collateral, unlike informal lenders who know borrowers personally and lend without collateral.
3. Informal lenders as only option: Since poor people cannot fulfil collateral requirements, they are forced to depend on moneylenders who charge very high interest rates, worsening their condition.
4. SHG solution: Self-Help Groups help the poor overcome this problem by pooling savings, enabling banks to lend to them collectively even without individual collateral.

Source: Chapter 3 — Money and Credit, Terms of Credit & Self-Help Groups for the Poor

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• The examiner expects a clear definition of collateral (1 mark), followed by 2–3 developed points explaining why its absence hurts the poor (3–4 marks).
• Always link the problem to the formal vs. informal credit contrast — banks need collateral, moneylenders do not but charge high interest.
• Mentioning SHGs as a solution shows complete understanding and fetches full marks.
• Avoid writing in essay form; use short paragraphs or numbered points for clarity in board exams.