Question

why is the supervision of the functioning of formal sources of loans necessary?

Answer 1

In the past, the people in this country were charged very high rates of interest for loans by the money lenders. This affected the poorer sections of society the most. This led to the country developing its banking system. Post-independence, most of the banking industry was under private ownership. In 1969, many leading banks were nationalised and brought under Government control. The Reserve Bank of India too started taking greater control over the banking system. So, a formal and regulated channel for obtaining loans was opened up and expanded over the years. But, even the formal sources for loans requires supervision as the Government tries to ensure that the people can obtain finance at a reasonable rate and undue advantage is not taken by any institution, many of which are now in the private sector thanks to the opening up of the economy. 

Answer 2

Formal source of loans means loans from banks, financial institutions. Informal source includes private lenders like seth sahukars, mahajans, etc.

There is absolutely no monitoring for informal lenders and rates of interests are high but RBI supervises formal lenders in India. The bank primary work is accepting deposits and giving loans. It works for all citizens of India of all types of background and status. Therefore loans should be available to all sections of society. Availability of loan to poor people can give them an opportunity to increase their earnings and contribute to the nation, It saves them from the ill practices of informal lenders.

However, supervision is necessary, as giving loans only to rich people may deny equality rights to weaker sections. Credit for only profit making or earning a cut in the loan may give birth to several corruption practices. Banks have to maintain cash reserve ratio which ensures the liquidity and smooth functioning of branches. Giving out loans more than required, improper background check, poor valuation of collateral etc can eventually lead to crisis, recession or fallout in an economy.