Credit in developing countries can be granted through formal or inform

Question

Credit in developing countries can be granted through formal or informal channels. Formal channels include institutions such as banks, credit cooperatives, and government agencies. Loans of this type accrue positive interest and are typically court enforced. Informal credit channels include relatives, friends, community members, moneylenders, rotating savings and credit associations, and informal intermediaries. Loans such as these may or may not accrue positive interest. Loans of either type may be used by the borrower for consumption or investment in a business. In 1930s rural China, informal credit was sometimes court enforced. However, it was more often self-enforcing, especially in remote areas. With a positive–interest rate loan , the borrower would pay principal and interest. With a zero–interest rate loan , the borrower would repay the principal and provide some non-monetary resource in lieu of interest. For example, the borrower might have supplied land, labor, or draft animal services to the lender.The table shows data from a comprehensive survey, conducted in 1936, of all households in 21 villages in what is now northeast China. It includes all loans reported as occurring during 1935. A loan involves security if and only if it involves a written (as opposed to a verbal) contract, the presence of a third-party guarantor, or collateral. Loans of fixed duration involve a well-defined repayment period. https://gmatclub.com/forum/download/file.php?id=76768For the loans presented in the table, the graph shows the relationship between the average (arithmetic mean) annual interest rate by village and the percent of loan contracts that were negotiated at zero interest. https://gmatclub.com/forum/download/file.php?id=76769 2024-06-03_18-40-38.png
GID0675.gif https://gmatclub.com/forum/download/file.php?id=38593 https://gmatclub.com/forum/download/file.php?id=38592 https://gmatclub.com/forum/download/file.php?id=38591

chetan2u · Accepted Answer

The first Tab talks of type of loans and the next two tabs talk of the loans in 21 villages in 1935 in present northeast China.

Q.1 According to the information provided, a lender who offered one of the zero–interest rate loans included in the table would accurately be described as making which of the following trade-offs?
 The first Tab gives us a reason of zer0-interest rate loans, and that is ' With a zero–interest rate loan, the borrower would repay the principal and provide some non-monetary resource in lieu of interest '. 
Giving up a fixed duration of repayment in exchange for security..NO
Giving up interest payments in exchange for security..NO
 Giving up interest payments in exchange for access to other resources..YES 
  Hence, No, No, Yes.

Q.2. If one of the loans in the survey is considered at random, with no prior knowledge of the village in which it was issued, which of the following factors would, if known, increase the probability that the loan is a zero–interest rate loan?
 We have to look at the graph for the answer.  Where does the probability on X-axis exceed 50% ? It is at mean value(Y-axis) above 25%. 
The village’s mean annual interest rate in 1935 was greater than 45%....  We can check that there are only two dots above 45% in Y-axis, and both these dots correspond to more than 80% on X-axis, so YES 
The lender anticipated that the borrower would be unable to supply land, labor, or draft animal services in the future.... Rather it is the opposite. Zero-interest loan meant that there will be no monetary transaction, and the interest that could be accrued would be compensated by resources mentioned in the option. Hence NO 
The village’s mean annual interest rate in 1935 was less than 20%.... There is only one dot and that gives the probability as 23%, which is below the majority mark 
  Hence, Yes, No, No.

Q.3. The information in the table and graph most strongly indicates that which one of the following is true of the loans in the table?

We have to restrict to the table and the table gives us the following to be true.+.  363 zero-interest vs 300 positive interest  
A greater number of zero–interest rate loans than positive–interest rate loans were negotiated.

BongBideshini · Answer

Official Answer: Q1  
  RO1,  Giving up a fixed duration or repayment in exchange for security :  
 Note on the Loan Table tab in the zero-interest column that only 25.3% of zero-interest rate loans had a fixed duration. We can infer that 74.7% of zero-interest loans did not have a fixed duration. But at most 5.6% of zero-interest loans in total had any of the three types of security (and some or all of those loans may have had a fixed duration). Therefore, it would NOT generally be accurate to say that a lender who offered one of the zero-interest loans gave up a fixed duration of repayment in exchange for security. 
  The correct answer is  No .

RO2,  Giving up interest payments in exchange for security :  
 Note on the Loan Table tab in the zero-interest column that at most 5.6% of zero-interest rate loans in total had any of the three types of security (it could be less than 5.6% because some loans might have more than one of the types of security). So, the vast majority of lenders who offered one of the zero-interest rate loans—and therefore gave up interest payments—received no form of security. Therefore, it would NOT be accurate to say that a lender who offered one of the zero-interest loans gave up interest payments in exchange for security. 
  The correct answer is  No .

RO3,  Giving up interest payments in exchange for access to other resources :  
 On the Credit Discussion tab, the second paragraph states that with zero-interest loans, borrowers would repay principal and also provide some non-monetary resource in lieu of interest. Therefore, it would be accurate to say that a lender who offered one of the zero-interest rate loans gave up interest payments in exchange for access to some other resource. 
  The correct answer is  Yes .

Official Answer: Q2

RO1,  The village’s mean annual interest rate in 1935 was greater than 45% :  
 The table on the Loans Table tab indicates that 363 of the loans in the survey were zero-interest rate loans and 300 of the loans in the survey were positive-interest rate loans. Therefore, if a loan in the survey is chosen at random, with no prior knowledge of the village, the probability that the loan is a zero-interest rate loan is approximately 55%. Consider the graph on the Interest Rates tab. There were two villages with mean annual interest rates in 1935 greater than 45%, and in each of them greater than 80% of the loans in the village were zero-interest loans, which is greater than the percentage of all the loans that are zero-interest rate loans. Therefore, if a loan in the survey is considered at random, knowing that the loan was in a village having a mean annual interest rate in 1935 greater than 45% is a factor that increases the probability that the loan is a zero-interest rate loan. 
  The correct answer is  Yes .

RO2,  The lender anticipated that the borrower would be unable to supply land, labor, or draft services in the future .  
 The Credit Discussion tab indicates that in lieu of interest, the lender of a zero-interest rate loan expects to receive from the borrower non-monetary resources such as land, labor, or draft services. Therefore, if a loan in the survey is considered at random, knowing that the borrower would be unable to supply land, labor, or draft services in the future makes it LESS probable that the loan is a zero-interest rate loan. 
  The correct answer is  No .

RO3,  The village’s mean annual interest rate in 1935 was less than 20% .  
 The table on the Loans Table tab indicates that 363 of the loans in the survey were zero-interest rate loans and 300 of the loans in the survey were positive-interest rate loans. Therefore, if a loan in the survey is chosen at random, with no prior knowledge of the village, the probability that the loan is a zero-interest rate loan is approximately 55%. Consider the graph on the Interest Rates tab. There was exactly one village with mean annual interest rates in 1935 less than 20%, and in that village less than 25% of loans were zero-interest rate loans, which is less than the percentage of all the loans that were zero-interest rate loans. Therefore, if a loan in the survey is considered at random, knowing that the loan was in a village having a mean annual interest rate in 1935 that was less than 20% makes it LESS probable that the loan is a zero-interest rate loan. 
  The correct answer is  No .

Official Answer: Q3

The table on the indicates that there were 363 zero-interest rate loans and only 300 positive-interest rate loans.
 The correct answer is    A greater number of zero-interest rate loans than positive-interest rate loans were negotiated   .

vivekthesmarty · Answer

chetan2u  
Can you please help me in analyzing why statement 5 in 3rd Qns:   Among loans that were not zero–interest rate loans, the majority were issued at interest rates of less than 40%.   is wrong?
Regards.

chetan2u · Answer

If we look at the graph, we may get tempted to answer yes as the % of non zero interest loans would be exactly opposite of what has been given for zero rate interest loan. Majority of the DOTS ( not loans) where zero interest rate is less than 50%, mean annual interest is less than 40%.

But there is no relation between the dots. It may be possible that majority say 99% of all the loans belong to just one dot and that is above 40% line.

Thus, because of insufficient info, the option is wrong.

siddharth_ · Answer

In how much time should one be able to complete this?  chetan2u

chetan2u · Answer

Any test would have one MSR consisting of three questions. Other than that there would be 6-7 each of G&T and DS along with 4-5 of TPA.

For all the 20 questions you get 45 minutes.
Each question other than MSR should take you not more than an average of 2 minutes, thereby leaving 10-11 minutes for the MSR.
As you are forced to toggle between three tabs, 3 - 3 1/2 minutes per question should be ok.

totamofficiis · Answer

I choose the right answer for this but I am confused why in q3 option 3 is not correct the number of the fixed period loan is 90 approx and number of loans used for consumption is 218 approx. so remainder of the loans approx 45 is not for consumption. Hence there will be atleast one loan such that it is used for consumption. the statement holds true till 45 loans which is 13% of the total loan. can any one explain. because i can not justify my right answer

Pikachuu · Answer

Hi  totamofficiis , think of overlapping sets.

Total Zero interest loans= 363 
 No. of fixed duration loans = 25.3% of 363 = ~90 = Let it be set A 
 No. of loans for consumption purpose = 62% of 363 = ~218 = Let it be set B

We need to test the statement  "At least one zero–interest rate loan of fixed duration was used for consumption"    
  Which is same thing as whether intersection of set A & B i.e. A∩B   ≥   1 ?

Here, 2 cases of venn diagram are possible- 
  1. Some overlap between A & B sets:  Then, yes, we can say for sure A∩B   ≥   1 
  2. No overlap between A & B (Set A & Set B are completely apart from each other):  Then, bad news, A∩B   =   0

Hence, overall, we are not sure about the Option C.   So, C can't be our answer.

Hope it helps.

Usernamevisible · Answer

Hi expert, looking at official solution I am bit confused. For question 1, statements, I solved using this information from the passage

With a zero???interest rate loan, the borrower would repay the principal and provide some non-monetary resource in lieu of interest. For example, the borrower might have supplied land, labor, or draft animal services to the lender.

However, official solution is using data to infer this, can you help me if my approach is correct ?
Official Answer: Q1
RO1, Giving up a fixed duration or repayment in exchange for security:
Note on the Loan Table tab in the zero-interest column that only 25.3% of zero-interest rate loans had a fixed duration. We can infer that 74.7% of zero-interest loans did not have a fixed duration. But at most 5.6% of zero-interest loans in total had any of the three types of security (and some or all of those loans may have had a fixed duration). Therefore, it would NOT generally be accurate to say that a lender who offered one of the zero-interest loans gave up a fixed duration of repayment in exchange for security.
The correct answer is No.

RO2, Giving up interest payments in exchange for security:
Note on the Loan Table tab in the zero-interest column that at most 5.6% of zero-interest rate loans in total had any of the three types of security (it could be less than 5.6% because some loans might have more than one of the types of security). So, the vast majority of lenders who offered one of the zero-interest rate loans???and therefore gave up interest payments???received no form of security. Therefore, it would NOT be accurate to say that a lender who offered one of the zero-interest loans gave up interest payments in exchange for security.
The correct answer is No.

FrozenDragon · Answer

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Psingh4249 · Answer

Hi, Can anybody explain the answer for Question 6, specially for option 'b' and 'c'?

suntprovident · Answer

Can someone explain the last question ?

egmat · Answer

Hi suntprovident,

Question  6  asks something very specific: for each option, can you  infer  that it's an  advantage for the borrower  of a zero-interest loan over a positive-interest loan of the  same amount ? "Infer" means it must be true, not just plausible. All three fail, and here's why.

(1) Fewer resources devoted to repayment - No.  From the  Credit Discussion tab , a zero-interest borrower repays the principal  and  hands over a non-monetary resource (land, labor, or draft-animal services) in lieu of interest. So they don't repay nothing - they repay principal plus something. Nowhere are we told that this non-monetary resource is  worth less  than the interest on a positive-interest loan would be. Without that, you can't conclude the borrower spends fewer resources.  Not inferable.

(2) A more flexible repayment period - No.  This is the tempting one. The  Loans Table  shows  25.3%  of zero-interest loans had a fixed duration versus  51.3%  of positive-interest loans. That's an  aggregate tendency across the group , not a property of any single loan. A randomly chosen zero-interest loan could easily be one of the fixed-duration ones. On top of that, the question demands an  advantage  - and nothing tells us a flexible period is better for the borrower. Two gaps, so  No .

(3) Fewer consequences associated with default - No.  Scan all three tabs: nothing compares what happens on default between the two loan types. Both were often self-enforcing, but we're given no comparison of consequences. With no evidence, you can't infer an advantage.  No.

So the answer is  No, No, No  - every option asks you to assume something no tab actually states.

A quick way to feel the trap in (2):

-  Tab A:  " 30%  of red boxes are heavy."
-  Tab B:  "You picked a red box."

Can you conclude  your  box is light? No - the  30%  is about the group, not your specific box. Same move here: a group percentage never guarantees the trait of one randomly chosen member.

Answer: No, No, No

Gaurav666 · Answer

Kindly explain Q4

egmat · Answer

Hi Gaurav666,

Q4 asks a single question three times: for a loan picked at random from the whole survey, is each trait true  more than half the time ? "Inferable" means the data must force it above  50% . Let's take them one at a time, using the total of  363  zero-interest +  300  positive-interest =  663  loans.

(1) Used for consumption - Yes

From the  Loans Table , consumption is  62.0%  of zero-interest loans and  58.7%  of positive-interest loans. Both columns are already above  50% , so no matter how you weight them, the combined share stays above half. A random loan is more likely than not used for consumption.

(2) Issued without security - Yes

This one needs a little bounding. A loan is "secured" if it has a written contract, a third-party guarantor, or collateral.

-  Zero-interest:  at most  5.6%  have any security -  at least 94.4% unsecured .
-  Positive-interest:  even if you add the three categories with zero overlap ( 10.3%  +  12.7%  +  10.3%  =  33.3% ), that's the  most  that could be secured -  at least 66.7% unsecured .

Both groups are overwhelmingly unsecured, so a random loan is far more likely than not to have no security. Yes.

(3) Supplied by relatives - No

Here's the trap. The  Credit Discussion  tab lists relatives as  one  of many informal sources (friends, community members, moneylenders, associations, intermediaries). Being  listed as a possible channel  tells you nothing about how often relatives actually made the loans. There is  no data anywhere  on the share supplied by relatives, so you cannot push it above  50% .  Not inferable  - No.

Quick way to feel (3): if a menu says a sandwich "may include ham, turkey, or cheese," you can't conclude most sandwiches have ham - the word appearing on the list isn't a count. Same here.

So the answer is  Yes, Yes, No .

Answer: Yes, Yes, No

preyunk · Answer

For Q6. "Select Yes for each of the following that, on the basis of the given information, can be inferred to represent an advantage for the borrower of a zero???interest rate loan over a positive???interest rate loan of the same amount. Otherwise, select No."

Shouldn't the answer be Yes for >> A more flexible repayment period?
Saying this as Fixed duration loan% is much lower for zero-interest rate loans compared to positive interest rate loan.

egmat · Answer

Hi preyunk,

I see exactly why (2) tempts you: on the  Loans Table  tab, only  25.3%  of zero-interest loans had a fixed duration versus  51.3%  of positive-interest loans, so as a group zero-interest loans do look more flexible. Your reading of the numbers is correct. The problem is what the question is actually asking.

Two gaps stand between that stat and a "Yes"

Gap 1 - group tendency isn't a per-loan fact.  The  25.3%  is a property of the  whole set  of zero-interest loans, not of the  one  loan you're comparing. The question fixes a single zero-interest loan against a positive-interest loan of the same amount. That specific zero-interest loan could easily be one of the  25.3%  with  a fixed duration - nothing forces it to be the flexible kind. Since "infer" means  must be true , an aggregate percentage can't get you there.

Gap 2 - "more flexible" isn't shown to be an advantage.  Even if the loan had no fixed duration, no tab tells us a flexible repayment period  benefits the borrower . The question asks specifically for an  advantage for the borrower , and that link is never stated. So the option fails on two counts - No.

A quick way to feel Gap 1

Strip it to two tiny sources:

Tab A:  " 25%  of red boxes are heavy."

Tab B:  "You just picked a red box."

Can you conclude  your  box is light? No - the  25%  describes the whole pile, not your one box. Q6 pulls the same move: a group percentage can never guarantee the trait of a single randomly chosen member.

That's why the official answer keeps (2) at  No .

Answer: No, No, No

	A greater number of zero–interest rate loans were negotiated in the village with the highest average annual interest rate than in the village with the second-highest rate.
	A greater number of zero–interest rate loans than positive–interest rate loans were negotiated.
	At least one zero–interest rate loan of fixed duration was used for consumption.
	In more than half of the villages with average annual interest rates ranging from 20% to 30%, zero–interest rate loans predominated.
	Among loans that were not zero–interest rate loans, the majority were issued at interest rates of less than 40%.

	For loans that were positive–interest rate loans, interest rates tended to be lower when loans were secured.
	Secured loans were more likely to be zero–interest rate loans than to be positive–interest rate loans.
	Positive–interest rate loans were more favorable to lenders than zero–interest rate loans.
	Zero–interest rate loans were more common than positive–interest rate loans were.
	Informal loans, regardless of loan type, were less likely than formal loans to be used for investment.

Credit in developing countries can be granted through formal or inform

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Yes	No
		Giving up a fixed duration of repayment in exchange for security
		Giving up interest payments in exchange for security
		Giving up interest payments in exchange for access to other resources

Yes	No
		The village’s mean annual interest rate in 1935 was greater than 45%.
		The lender anticipated that the borrower would be unable to supply land, labor, or draft animal services in the future.
		The village’s mean annual interest rate in 1935 was less than 20%.

Yes	No
		used for consumption
		issued without security
		supplied by relatives

Yes	No
		Fewer resources devoted to repayment of the loan
		A more flexible repayment period
		Fewer consequences associated with default

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