We need to expand formal sources of credit in India for several important reasons.

At present, credit is available from both formal sources like banks and cooperatives, and informal sources like moneylenders, traders, employers, relatives and friends. However, the distribution of formal credit is highly unequal. It is the richer households who receive credit from formal sources, whereas the poor have to depend on informal sources.

The main problem with informal sources is that most loans from informal lenders carry a very high interest rate and do little to increase the income of the borrowers. This makes credit expensive and unaffordable for the poor.

It is essential that the total formal sector credit increases so that the dependence on the more expensive informal credit becomes less. Banks and cooperatives need to lend more, particularly in rural areas. This would lead to higher incomes and many people could then borrow cheaply for a variety of needs. They could grow crops, do business, set up small-scale industries or trade in goods.

Additionally, it is necessary that formal credit is distributed more equally so that the poor can benefit from cheaper loans. Cheap and affordable credit is crucial for the country's development. Both expanding formal credit and ensuring its equitable distribution are important for development.