Topic - Formal Sector Credit In India

Reserve bank of India's (RBI) role in Formal sector
  • ·        Reserve Bank of India supervises the functioning of the formal.
  • ·        It monitors the banks in actually maintaining cash balance.
  • ·        RBI sees that banks give loans not only to the profit businesses and traders but also to small cultivators, small scale industries, small borrowers etc.




Informal sector
  • ·        There is no organisation which supervises the credit activities of lenders in the informal sector.
  • ·        They can lend at whatever rate they choose.
  • ·        There is no one to to stop them from using unfair means to get their money back
  • ·        Thus, the cost to the borrowing of informal loans is much higher.
  • ·        The informal sector charges a very high interest rate, which the poor people are not able to pay back, and they get trapped in the debt trap.
  • ·        Hence, the banks and cooperatives need to lend more. This would need to higher incomes and many people could then borrow cheaply for a variety of needs.
  • ·        Cheap and affordable credit is crucial for the country's development.



Why is it important that the formal sectors should lend more?
  • ·        The formal sector still meets only about half of the total credit needs of the rural people.
  • ·        Most loans from the informal lenders carry a very high interest rate and do little to increase the income of the borrowers.
  • ·        Thus the banks and the cooperatives need to lend more particularly in the rural areas, so that the dependence on the informal sector reduces.
  • ·        While formal sector loans need to expand, it also necessary that everyone receives the loans.