Why do people living in rural areas prefer borrowing money from an informal source than from a formal source like banks?

Getting a loan from bank is difficult

Banks are not present everywhere in rural India. Even when they are present, getting a loan from a bank is much more difficult than taking a loan from informal sources. Bank loans require proper documents and collateral. Absence of collateral is one of the major reasons which prevents the poor from getting bank loans. Informal lenders such as moneylenders, on the other hand, know the borrowers personally and hence are often willing to give a loan without collateral. However, the moneylenders charge very high rates of interest, keep no records of the transactions and harass the poor borrowers.