Why is the supervision of the functioning of formal sources of loans necessary?[CBSE 2016]

The Reserve Bank of India (RBI) supervises the functioning of the formal sources of loans i.e. the banks and cooperatives in order to ensure that the banks give loans not just to profit-making businesses and traders but also to small scale industries and small borrowers etc.

NOTE – Supervision of the formal sources of loans ensures the fair and systematic functioning of such sources. In this process, the banks are periodically required to submit to the RBI on how much they are lending to whom, at what interest rate etc.