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

1. The formal sector i.e. the banks and the cooperatives need to engage more in the lending activities because of the disadvantages posed by the informal sector including high rates of interest and the unfair means that are involved in this process.

2. Borrowings at many cheap rates from the formal sector would encourage higher incomes which would, in turn, lead to an increase in the number of borrowings from the banks for various purposes.

3. An increase in borrowings would help people in growing crops, do business, set up small-scale industries etc which would add to the development aspect of a country. Therefore, affordable credit is crucial for a country’s development.

NOTE – The formal sector (banks and cooperatives) in comparison to the informal sector (moneylenders, traders, employers, relatives and friends) needs to increase its lending activities because it provides cheap and affordable credit. The high rates of interests on loans given by informal sector often force the borrower into a debt trap (instead of making one prosperous, it worsens the situation), from which recovery is very painful.