Question

why do we need to expand formal source of credit in India Explain any 5 points

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

1. Every loan agreement specifies an interest rate which the borrower must pay to the lender along with repayment of the principal.

2. In addition, lender may demand collateral, i.e., an asset that the borrower owns and uses this as a guarantee until the loan is repaid.

3. If the borrower fails to repay the loan, the lender has the right to sell the collateral to obtain payment.

4. Terms of credit comprise interest rate, collateral and documentation requirement, and the mode of repayment.

5. The terms of credit vary substantially from one credit arrangement to another. They may vary depending on the nature of the lender and the borrower.