Assertion (A): Higher cost of borrowing from informal lenders can lead to a debt trap for poor borrowers.
Reason (R): When the interest to be repaid exceeds the income of the borrower, the debt keeps rising and the borrower's situation worsens.
Generated by claude-sonnet-4-6 · 2026-06-26 13:23 · grounding rag
Model Answer
Option A — Both A and R are true, and R is the correct explanation of A.
Informal lenders charge very high interest rates. When the amount to be repaid exceeds the borrower's income, debt keeps rising, directly causing a debt trap.
Source: Money and Credit, Formal Sector Credit in India
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Explanation
- A is true: The textbook explicitly states that high informal borrowing costs can lead to a debt trap (e.g., Rama in Sonpur).
- R is true and explains A: R describes the exact mechanism — when repayment amount > income, debt increases continuously, which is precisely why high-cost borrowing causes a debt trap.
- So R is not just true but is the direct causal explanation of A → choose Option A, not B.
- Key phrase to remember: "the amount to be repaid is greater than the income of the borrower → increasing debt → debt trap."