Question

why do we need to expand formal sources of india.

Answer 1

We need to expand the formal sourcesof credit because of the following reasons;) (1) Formal sources of credit are less risky and they charge less rate of interest . (2) The RBI supervises the functioning of formal sources if loans. It monitors the bank in actually maintain cash balance.

(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.

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Answer 2

ANSWER;

. The cost of informal loans is much higher and often leads to a debt trap. Also, people who might wish to start a new enterprise by borrowing may not do so because of the high cost of borrowing in such a case.

. Most loans from informal lenders carry a very high interest rate and do little to increase the income of the borrowers. Thus, it is necessary that banks and cooperatives increase their lending particularly in the rural areas, so that the dependence of the poor on informal sources of credit reduces.

. It is important that the formal credit is distributed more equally so that the poor can benefit from the cheaper loans.