Answer :

1. The formal sector i.e. the banks and the cooperatives need to engage more in the lending activities because of the disadvantages posed by the informal sector.

2. There is no organisation which supervises the credit activities of lenders in the informal sector. They can lend at whatever interest rate they want and there is no one to stop them from using unfair means to get their money back.


3. The high cost of borrowing discourages many people who wish to start an enterprise. It also significantly reduces the income of the borrower as much of the earnings go into repayment of the loan.
4. Borrowings at much cheap rates from the formal sector would therefore encourage higher incomes which would in turn lead to an increase in the amount of borrowings from the banks for various purposes.


5. An increase in borrowings would help people in growing crops, do business, set up small scale industries etc which would add to the development aspect of a country.


NOTE - The formal sector includes banks and cooperatives while the informal sector includes moneylenders, traders, employers, relatives and friends, etc who provide loan facilities to the people. The formal sector (banks and cooperatives) in comparison to the informal sector (moneylenders, traders, employers, relatives and friends) needs to increase its lending activities because it provides cheap and affordable credit. The high rates of interests on loans given by informal sector often force the borrower into a debt trap (instead of making one prosperous, it worsens the situation), from which recovery is very painful.


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