For the Development of a nation, affordable and cheap credit is absolutely essential. To make sure that the poor can benefit from the cheaper loans, it is important that the formal credit is distributed more equally.
- Informal sources are the source of loans for 85 per cent of the loans taken by poor households in the urban areas.
- In urban areas, only 10% of the rich households depend on informal sources of credit. 90% of the rich households in urban areas take the loans from formal sources.
- As poor households majorly get the loans from informal sources they have to pay large amounts for borrowing, whereas the rich people get cheap loans from formal credit sources.
- All these points out that formal sources of credit only meet the credit needs of some people in rural areas.
- When loans are taken from informal sources of credit, a larger part of the earnings of the borrowers is used to repay the loan, due to higher cost of borrowing
- In certain cases, the amount to be repaid is greater than the income of the borrower due to the high interest rate for borrowing.
- Therefore many poor people may not be willing to take loans, to avoid falling into debt traps, thereby reducing the opportunities for expansion of the economy.