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why do we need to expand formal sources of credit in India?explain five reasons.
We need to expand formal sources of credit in India for many reasons:
1. Compared to formal lenders, most of the informal lenders charge much higher interest rates on loans like 3% to 5% per month i.e. 36% a year.
2. Besides the high interest rate, informal lenders impose various other tough conditions. For example, they make the farmers promise to sell the crop to him at a low price. There is no such condition in formal sector.
3. Informal lenders do not treat well with the borrowers. On the other hand, there is no such situation no such situation in the formal sector.
4. The Reserve Bank of India supervises the functioning of formal sources of loans. In contrast, there no organization which supervises the credit activities of lenders in the informal sector.
5. Loans taken by poor people from informal lenders sometimes, lead them to debt-trap because of high interest rate.
6. The formal sources of credit in India still meets only about half of the total credit needs of the rural people.
So, it is necessary that the formal sources of credit expand their lending especially in rural areas, so that the dependence on informal sources of credit reduces as this will also help in the development of the country.  


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