alleryHigher rate of interest in informal lending is risky because
Abanks may withdraw all licences
Bit raises cost of credit, can lead to debt-trap and reduces investment
CRBI prefers higher rates
Dthe government will subsidise it
Answer & Solution
Correct answer: B. it raises cost of credit, can lead to debt-trap and reduces investment
1. High informal interest rates make credit expensive for borrowers.
2. They can push families into debt-trap and discourage productive investment.
3. Hence shifting to formal credit at lower interest is preferred.
_Source: syllabus Understanding Economic Development, Ch 3 "Money and Credit"_
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