Question

Read the given comprehension and answer the questions that follow :
Development is sustained by a proper credit policy. By giving loans to industries and trade, banks provide
them with the necessary funds for carrying on their business without problems. This results in increased
production and services, more employment and profit. Caution is required by the lenders when highriskare
expected, so that there are no losses. Credit from the formal sector needs to be increased, as loans from the
informal sector which have very high interest rates, do more harm than good. For this reason, it is important
that the formal sector gives out more loans so that borrowers are not exploited by informal sector money
lenders and the results will definitely contribute to national development. It is also true that in situations with
high risks, credit might create further problems for the borrowers. Credit helps the people to increase their
earnings but in some situtations, it pushes the people into debt-trap. If people are not able to repay the loan,
they have to sell their assets or land. For example, in rural areas, the main demand for credit is for crop
production which involves considerable cost on seeds, fertilisers, pesticides, etc. farmers take such crop loans
at the very beginning of the season and repay the loan after harvest. Loans repayment is fully dependent on
the income from the farming. But crop failure makes it impossible to repay their loan, as a result, the farmers
often have to sell a piece of their land to repay the loan. Credit here plays a negative role and lowers down the
financial position of the farmers, it pushes them in a state from which recovery of loan is very painful.
a) According to the paragraph loan for which activity is associated with more risk? Why?
b) Mention any one disadvantage of taking loan from a money lendor.
c) According to you which sector loan should be encouraged for the development of the country? Why?
d) “Formal sector don’t try to extend loan to the small farmers”. Give reason.

Answer 1

Explanation:

sorry this is not in my syllabus