Why do we need to expand formal sources of credit in India? Give three reasons

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economics
money-and-credit
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#1

Why do we need to expand formal sources of credit in India? Give three reasons.

Answer:

  • The cost of informal loans is much higher and often leads to a debt trap. Also, people who might wish to start a new enterprise by borrowing may not do so because of the high cost of borrowing in such a case.
  • Most loans from informal lenders carry a very high interest rate and do little to increase the income of the borrowers. Thus, it is necessary that banks and cooperatives increase their lending particularly in the rural areas, so that the dependence of the poor on informal sources of credit reduces.
  • It is important that the formal credit is distributed more equally so that the poor can benefit from the cheaper loans.