Why do you think that the share of formal sector credit is higher for the richer households compared to the poorer households?
The share of formal sector credit is higher for richer households because they are able to receive credit from formal sources like banks and cooperatives. The context shows that in urban areas, 83% of loans taken by rich households are from formal sources, while only 46% of loans for poor households come from formal sources.
Poorer households have to depend on informal sources such as moneylenders, traders, employers, relatives and friends. These informal lenders charge very high interest rates, which means the poor have to pay a large amount for borrowing. The rich households avail cheap credit from formal lenders.
The text indicates that this disparity exists because formal credit is not distributed equally. It emphasizes that the poor should get a much greater share of formal loans so they can benefit from cheaper credit and reduce their dependence on expensive informal sources.
Explanation
The textbook context clearly establishes the pattern of credit distribution between rich and poor households. It states that 'it is the richer households who receive credit from formal sources whereas the poor have to depend on the informal sources.' The data from Graph 2 shows that in urban areas, rich households get 83% of their loans from formal sources compared to poor households who rely 54% on informal sources. The context emphasizes the need for more equitable distribution of formal credit so that the poor can access cheaper loans instead of depending on informal lenders who charge high interest rates.