The main reasons for formal credit not being available to the rural poor, due to which they are dependent on informal credit sources are
(i) Lack of documents of employment, earnings, etc to convince banks that they will be able to repay the loan.
(ii) They usually lack any property which can act as collateral or security against loan default.
There is a need to expand rural credit so that the rural borrowers are encouraged to take loans from formal sources because
(i) Rural borrowers depend on informal sources like moneylenders who charge them high rates of interest, which can sometimes drag them into a debt-trap. Thus it is necessary that banks and cooperatives increase their lending particularly in the rural areas so that dependence on informal sources will reduce.
(ii) Formal sector must distribute loan equally, so that poor can benefit from the cheaper loans.