Why do poor farmers get into debt trap of informal sector?

(i) There is no organisation which supervises the credit activities of lenders in the informal sector.

(ii) They can lend at whatever interest rate they choose.

(iii) There is no one to stop them from using unfair means to get their money back.

(iv) Compared to the formal lenders, most of the informal lenders charge a much higher interest rate on lo So the cost to the borrower of informal loans is much higher.

(v) Higher cost of borrowing means a larger part of the earnings of the borrower is used to repay the loan.

(vi) The higher interest rate of borrowings can mean that the amount to be repaid is greater than the income of the borrower. This could lead to increasing debt and debt trap.