Why do we need to expand formal sources of credit in India? Explain.

OR

Why do banks and cooperative societies need to lend more? Explain.

We need to expand formal sources of credit in India due to the following reasons:

● The formal sector loans consist of the banks and the cooperatives. The informal sector consists of money lenders, traders, employers, etc.

● The informal sector usually tends to exploit the borrowers by charging a very high rate of interest.

● The formal sector is extremely important to save people from such kind of exploitation.

● The formal sector charges a comparatively low interest on loans as compared to the informal sectors.

● It provides cheap and affordable credit to the borrower.

● It safeguards the borrower from the vicious circle of poverty which eventually leads to a debt trap.

● The Reserve Bank of India supervises the functioning of the formal sources of credit.

● It is done by imposing various rules and regulations to ensure that the banks give loans to small cultivators and borrowers and not only to the profit-making business and traders.

OR

The banks and cooperative societies need to lend more due to the following reasons:

● If the banks and cooperative societies extend a large amount of credit to the people it would lead to an increase in disposable income.

● The people will also have access to better quality goods and services due to the increased income.

● The small peasants and artisans will be able to set up small scale industries in their village area.

● The people usually change to borrow from informal sources of credit such as money lenders to charge a very high rate of interest.

● The people of severely exploited and humiliated by them.

● This is mainly because of the lack of formal banking services in the area and also due to the lack of awareness of the people.

● The formal credit must be distributed equitably so that the poor people can also benefit from the cheaper loans.

● Cheap and affordable credit is extremely important for the development of the country