Why is it necessary to expand formal sources of credit in rural areas? Explain.

(i) The formal sectors’ loans are from banks and cooperatives.

(ii) The Reserve Bank of India supervises the functioning of formal sources of loans.

(iii) It is necessary that banks and cooperatives increase their lending particularly in the rural areas, so that the dependence on informal sources of credit reduces.

(iv) While formal sector loans need to expand, it is also necessary that everyone receives these loans.

(v) It is important that formal credit is distributed more equally so that the poor can benefit from cheaper loans.

(vi) Formal credit charge low rate of interest. It reduces the chances of people falling in bad debt.