Question

Why is it necessary that banks and cooperatives increase their lending particularly in rural areas?

• A. To reduce the dependence on informal sources of credit
• B. To promote informal sources of credit in urban areas
• C. To provide high interest rate
• D. To increase the deposits of commercial banks

Answer 1

The correct option is A To reduce the dependence on informal sources of credit

• Banks and cooperatives should increase lending facilities in rural areas:
  1. The informal sector lends at a high-interest rate in rural areas so the cost for the borrower is much more.
  2. When the cost of borrowing of more, large portion of income goes in repaying loans rather than investing it.
  3. Often it leads to debt trap where the amount to be repaid is more than the borrower's income and he has to borrow more.
  Hence option A is correct.