Given that a large number of people in our country are poor, does it in any way affect their capacity to borrow?
Yes, poverty significantly affects people's capacity to borrow. Poor households face major difficulties in accessing loans from the formal sector (banks and cooperatives) because banks require proper documents and collateral. Since the poor lack assets to offer as collateral, they are often denied bank loans.
As a result, the poor are forced to depend on informal sources of credit like moneylenders. These informal lenders charge very high interest rates, which increases the cost of borrowing. A large part of the borrowers' earnings goes into repaying these loans, leaving them with less income. In some cases, the amount to be repaid exceeds their income, pushing them into a debt trap. This cycle of high-cost borrowing and debt further reduces their capacity to borrow in the future.
Explanation
The answer draws directly from the textbook context which explains that absence of collateral is a major reason preventing the poor from getting bank loans. The context clearly states that while rich households avail cheap credit from formal lenders, poor households have to depend on informal sources and pay a large amount for borrowing. The high interest rates from informal lenders lead to debt traps, which affects their future borrowing capacity.