The reasons for expanding credit in India are(i) High cost of borrowing leads to a major share of earnings going into payment of interest on the loan.(ii) Sometimes the higher interest rate leads to the requirement to pay more than the earnings, thus falling into a debt-trap.(iii) Borrowers falling into debt-traps discourage more people from borrowing, thus reducing development of the country.(iv)Banks and cooperative societies lending to more borrowers will lead to higher incomes and many people could then borrow cheaply for a variety of needs like growing crops, set-up business or small-scale industries.

Why do we need to expand formal sources of credit in India?

Expanding formal sources of credit in India is crucial for several reasons. It can contribute to the overall economic growth and development of the country, promote financial inclusion, reduce poverty, and enhance the standard of living for individuals and businesses. Let's delve into the details:

Promoting economic growth:
- Formal sources of credit, such as banks and financial institutions, play a vital role in providing funds to various sectors of the economy, including agriculture, manufacturing, and infrastructure.
- Access to credit enables businesses to invest in new projects, expand operations, hire more workers, and generate economic growth.
- It stimulates entrepreneurship and innovation, leading to technological advancements and increased productivity.

Financial inclusion:
- Expanding formal sources of credit helps to bring the unbanked population into the financial system. According to the World Bank, around 190 million adults in India remain unbanked.
- Access to formal credit can provide individuals with a safe and regulated means to save, borrow, and invest.
- It allows people to build credit histories, which can open doors to better opportunities in the future.

Reducing poverty:
- Formal sources of credit can contribute to poverty reduction by enabling individuals to invest in income-generating activities, such as starting a small business or acquiring productive assets.
- It provides vulnerable sections of society, such as farmers and small-scale entrepreneurs, with the necessary financial support to enhance their livelihoods.
- Access to credit can also act as a safety net during times of emergencies or unforeseen expenses, preventing individuals from falling deeper into poverty.

Enhancing standard of living:
- Formal credit sources offer better interest rates, terms, and conditions compared to informal lenders, reducing the burden on borrowers.
- With increased access to credit, individuals can invest in education, healthcare, housing, and other essential needs, thereby improving their overall standard of living.
- It empowers individuals and households to make long-term investments in human capital and durable assets, leading to social and economic development.

In conclusion, expanding formal sources of credit in India is crucial for promoting economic growth, achieving financial inclusion, reducing poverty, and enhancing the standard of living for individuals and businesses. It can contribute to a more inclusive and resilient economy, benefiting both the society as a whole and the individuals within it.