Question

'Formal sector of credit is better than informal sector.' Give arguments in support of your answer.

Answer 1

In India, more formal credit sources must be established.

1. To avoid getting into debt.
2. It offers inexpensive and manageable credit.
3. To protect individuals from being exploited by the unorganised sector.
4. Loan interest rates are low at formal institutions.
5. The RBI regulates formal sector credit by enforcing regulations and norms prioritising lending to small farmers, borrowers, and individuals above profit-seeking traders and enterprises.

Bad effects of informal sources of credit on borrowers:

1. Higher interest rate.
2. Higher borrowing costs mean more borrower's earnings are used to repay the loan.
3. A high interest rate on a loan could make it such that the total amount due is more than the borrower's income in some situations.
4. This could lead to increasing debt and a debt trap.
5. Any other relevant point.