'Formal sources are necessary in the rural areas for the development of the rural infrastructure'. Explain it.

Dear student,

Here is the answer:

Formal sources of credit are the ones that are supervised by the RBI. These loans are given by banks and cooperatives. On the other hand informal sources of credit are not supervised by any government authority. These include credit from money lenders, friends, relatives and traders etc. As the informal sector is not supervised by any organisation, they charge higher interest rates. They also use unfair means to get their money back. They also have higher cost of borrowing which means a large part of the earning of the borrower goes into repaying the loan.  The moneylenders also keep no records of the transactions and harass the borrowers.

For these reasons formal sources such as government banks and cooperative societies need to lend more.  

• Formal sources of credit charge low interest rates which means that the amount that needs to be repaid is lower and borrowers would have more income left for themselves. 
• Due to low interest rates many people would be able to borrow.
• If formal sources provide them credit, the farmers can buy equipments and other things required for agriculture, they can set up small-scale industries. Thus cheap and affordable credit is important for the country’s development.
• Government banks and cooperatives should increase their lending capacities particularly in the rural areas, so that they are no longer dependent on informal sources of credit.
• The formal sources of credit should be equally made available to the poor so that they can benefit from it.
• The government banks should increase the number of their branches in rural areas. Once people start depositing more into their savings bank accounts, it will increase the availability of bank credit.

Regards