Question

Necessity of formal sources of credit expansion in rural area

Answer 1

The reasons are;

(i) High cost of borrowing leads to a major share of earnings going into payment of interest on the loan.

(ii) Sometimes the higher interest rate leads to the requirement to pay more than the earnings, thus falling into a debt-trap.

(iii) Borrowers falling into debt-traps discourage more people from borrowing, thus reducing development of the country.

(iv)Banks and cooperative societies lending to more borrowers will lead to higher incomes and many people could then borrow cheaply for a variety of needs like growing crops, set-up business or small-scale industries.