Should the credit activities of the informal sector be discouraged? Why?

Informal sources of credit include moneylenders, employers, traders, etc. This type of lending should be discouraged due to the foll. reasons:

1. They charge an unreasonably high rate of interest.

2. There are no proper terms of credit followed for example documentation, the rate of interest, collateral, etc.

3. Since the rate of interest is high, a large part of savings of borrower goes into its repayment.

Many times, the informal lending give rise to a debt trap.