Answer :
Final answer:
Self-help groups help borrowers overcome the problem of lack of collateral by pooling resources together, offering loans to members without the traditional collateral banks would require. This allows for an increase in loans being given as more people participate in these groups.
Explanation:
Self-help groups (SHGs) can play a crucial role in helping borrowers overcome the problem of lack of collateral. These groups usually consist of members who are from a similar social and economic background. By pooling their resources together, members of SHGs can lend money to each other without the need for collateral, thus overcoming the traditional barriers that individuals might face when trying to access loans from banks.
Typically, in the financial capital market, before a bank makes a loan, it requires a prospective borrower to fill out forms regarding income sources. In addition, the bank conducts a credit check on the individual's past borrowing. Another approach is to require a cosigner on a loan; that is, another person or firm who legally pledges to repay some or all of the money if the original borrower does not do so. Alternative to this, the banks often require collateral, often property or equipment that the bank would have a right to seize and sell if the borrower does not repay the loan.
With SHGs, members pool their resources together, allowing for borrowers to obtain loans that they otherwise may not have been able to access due to the lack of collateral or good credit check. The quantity of loans increase as more people participate in lending within the SHGs.
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