Formal sector credit which includes loans from banks and cooperatives need to be expanded in India so as to save people and especially poor farmers and workers from the exploitation from the informal sector credit. Informal sector charges a higher interest on loans which means that a large part of the earnings of the borrower is used to repay the loan. A borrower may fall into debt-trap. As compared to it, formal sector lends at a reasonable rate of interest which is very cheap as compared to informal credit. Formal credit can fulfil various needs of the people through providing cheap and affordable credit. RBI also supervises the formal credit through various rules and regulations which ensures that banks give loans to small cultivators, small borrowers, etc. and not just to profit making businesses and traders. All this necessitates expanding formal credit in India so as to reduce dependence on informal sources of credit.
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