Question

Why shoud banks and cooperatives lend more? or Why should formal sources of credit increase their lending particularly in the rural areas.

Answer 1

1. Most of the farmers are very poor, they do not have any surplus money.
2.Moneylenders charge very high rate of interest. This leads to increasing debt and debt trap.
3. Moneylenders use unfair means to get their money back.
4.Cheap and affordable credit is must for rural development.
5.Cheap credit helps in lowering the cost of production.
6. Since the RBI supervises the functioning of the formal sources of loans, so the people of rural India would not be cheated as in the case of moneylenders.
7. Also, if the banks and cooperatives are established in rural areas, so it will save people's time especially during sowing/harvest season.
Hope this helps you !!

Answer 2

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.