Question

___________________costs of borrowing increase the debt-burden.

Answer 1

The correct answer is High costs of borrowing increases the debt-burden.

• Usually the poor have to depend on informal sources of credit and it is the richer households who receive formal credit.
• In the informal sector, lenders can lend at whatever interest rate they choose.
• But informal lenders tend to charge very high rates of interest, which are higher than the banks.
• When the rate of interest is very high there is a possibility of poor people falling into a debt trap.
• Since the cost of borrowing is very high from informal sources of credit, a large part of the earnings of poor people may likely be used to repay the loan.
• Most loans from informal lenders do very little to increase the income of borrowers as they carry a very high interest rate.
• In certain cases, people also could end up in a situation where the amount to be repaid is greater than their income.
• Hence there is a possibility that informal lenders could end up harassing poor people if the required amount is not paid back at the right time.
• There is no organization to check the unfair methods used by lenders to get their money back.
• Reserve Bank of India (RBI) makes sure that banks not only provide loans to traders and profit making businesses but also to small borrowers, small scale industries and small cultivators.
• To make sure that the poor can benefit from the cheaper loans, it is important that the formal credit is distributed more equally.