(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) The higher interest rate of borrowing can mean that the amount to be repaid is greater than the income of the borrower.
(v) This could lead to increasing debt and eventually a debt trap situation.
(vi) Also, people who might wish to start a business by borrowing may not do so because of the high cost of borrowing.
For these reasons, banks and cooperative societies need to lend more. This would lead to higher incomes and many people could then borrow at cheap rates for a variety of needs.
Cheap and affordable credit is crucial for the country’s development.