Should there be a supervisor, such as the Reserve Bank of India, that looks into the loan activities of informal lenders? Why would its task be quite difficult?
Yes, there should be a supervisor for informal lenders. Currently, there is no organisation which supervises the credit activities of lenders in the informal sector. They can lend at whatever interest rate they choose, and most loans carry very high interest rates that do little to increase borrowers' income.
However, supervising informal lenders would be quite difficult. Banks are not present everywhere in rural India, and informal lenders operate in areas where formal institutions don't reach. Moneylenders know borrowers personally and lend without collateral. This makes it challenging to monitor their activities effectively, as they function in a decentralized manner without proper documentation.
Explanation
The textbook clearly states that there is no organisation supervising informal lenders, allowing them to charge arbitrary interest rates. The difficulty in supervision arises from the informal sector's widespread presence in rural areas where banks don't reach, and the personal relationships between moneylenders and borrowers that don't require collateral or documentation.