(i) Compared to the formal lenders most of the informal lenders charge a much higher interest on loans. It means that the cost to the borrower of the informal loans is much higher.
(ii) Higher cost of borrowing means a larger part of earning of the borrowers is used to repay the loan and they have less income left for themselves.
(iii) The high rate of interest of borrowing can mean that the amount to be repaid is greater than the income of the borrower and this could lead to increasing debt and debt-trap.
(iv) People who might wish to start an enterprise by borrowing may not do so because of the high cost of borrowing.
(v) For these reasons banks and cooperatives need to lend more. This would lead to higher incomes and many people could then borrow cheaply for a variety of needs.
(vi) They could grow crops, do business, set up small-scale industries etc. They could set up new industries or trade in goods.
(vii) Cheap and affordable credit is important for the country’s development. Hence, it is necessary to expand formal sources of credit in our country.
