Describe the importance of formal sources of credit in economic development.

OR

Describe the bad effects of informal sources of credit on borrowers.

The importance of formal sources of credit in economic development is mentioned below:

1. The formal sources of credit consist of banks and cooperative societies.

2. The credit activities of the sector of supervised by the Reserve Bank of India.

3. It provides credit to all at a low rate of interest.

4. This is a better source of credit as compared to the informal sources of credit.

5. The informal sources of credit include moneylenders, traders, lenders, relatives, and friends.

6. The informal sources of credit exploit the people by charging exorbitant rate of interest.

OR

The bad effects of the informal sources of credit on borrowers is mentioned below

1. The informal sources of credit include moneylenders, traders, lenders, relatives, and friends.

2. The informal sources of credit exploit the people by charging exorbitant rate of interest. This makes the cost of borrowing even higher.

3. The higher cost of borrowing indicates that a large part of the earning of the borrowers will be used to repay the loan. They will have less income left for themselves.

4. Those people who wish to start their own business by borrowing may not be able to do so due to this high cost.