Why is it necessary for the banks and cooperative societies to increase their lending facilities in rural areas? Explain. [CBSE 2015]

Banks and cooperatives should increase lending facilities in rural areas:

1. The informal sector lends at a high-interest rate in rural areas so the cost for the borrower is much more.

2. When the cost of borrowing of more, large portion of income goes in repaying loans rather than investing it.

3. Often it leads to debt trap where the amount to be repaid is more than the borrower’s income and he has to borrow more.

Explanation: Without the benefits of the formal sector, rural households have no option other than going to informal lenders who only exploit them.