Question

why are formal sources of credit preferred over the informal sources of credits. give 3 reasons

Answer 1

The reasons for expanding credit in India 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.

Answer 2

HEY MATE!

Formal sources of credit is preferred over the informal sources of credit because :

✳️Formal sources of credit provide high amount of money for less interest

✳️There is no exploitation or harassment in formal sources of credit

✳️It helps in completing production on time

✳️it is safe and secure as RBI supervises the banks

✳️It is systematic in its functioning

✳️They maintain proper book of accounts

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