Choose if the given statement is True/False.

Informal sources of credit often lead to debt traps.

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True

False

answer is A.

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Detailed Solution

The given statement is True.
Informal sources of credit include moneylenders, SHGs, employers, relatives, and friends. In the case of informal credit, the amount repaid is often more than the amount borrowed, resulting in excessive debt or a debt trap. The people in rural areas shy away from formal sources of credit because of a lack of education and knowledge and are more familiar with the informal sources of credit, which often results in exploitation by moneylenders and debt traps. It is seen that promoting repetitive borrowings in informal credit results in debt traps. The lenders are only interested in making profits and often exploit the borrowers. They impose unreasonable and tough terms on the borrowers. In informal credit, there are a lot of fraudulent activities as they are not supervised by a higher authority that may have maintained specific terms.

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