Cheap and affordable credit is crucial for the country’s development. Discuss.

Access to affordable and low-cost credit plays a pivotal role in a nation’s economic development. The credit landscape can be divided into two sectors: formal and informal. The formal sector comprises institutional lenders such as banks and cooperatives, while the informal sector includes moneylenders, traders, employers, and even friends and family.

Formal sector loans typically offer more favourable terms with lower interest rates compared to their informal counterparts. However, these loans often require substantial documentation and collateral, making them inaccessible to small-scale farmers or budding entrepreneurs who lack such guarantees. Consequently, they may resort to informal loans, which carry significantly higher interest rates, placing a heavier financial burden on the borrower. A substantial portion of their earnings then goes into servicing these high-interest loans, leaving less for investment and growth.

This scenario underlines the need for formal credit institutions like banks and cooperatives to extend their services to underprivileged sections of society. By offering affordable credit, they could spur economic development at the grassroots level. Beneficiaries of such credit could then invest in agricultural activities, start small businesses, establish micro-industries, and trade goods, leading to income generation and upliftment of their economic status.

Currently, the lion’s share of formal sector credit is availed by the wealthier households, leaving the poorer strata dependent on costlier, informal credit sources. It’s, therefore, crucial to increase the volume of formal sector credit in the economy to lessen this reliance on informal, high-cost loans. Simultaneously, more equitable distribution of formal sector loans should be ensured so that the benefits reach the underprivileged sections.

Achieving these objectives could significantly boost economic development, fostering prosperity at both individual and national levels. Affordable credit can act as a catalyst for entrepreneurial spirit, driving job creation, enhancing productivity, and ultimately contributing to the nation’s overall economic growth.