Social Science (087) — AI-generated practice question

The RBI regulates formal lenders by monitoring interest rates, ensuring loans reach small borrowers, and requiring periodic reporting. No such body oversees informal lenders like moneylenders, who can charge any interest rate and use unfair means to recover money.

(i) Cost of borrowing: Without supervision, informal lenders charge very high interest rates. The poor, who mostly depend on informal credit, thus pay a much higher cost of borrowing compared to richer households who access cheap formal credit.

(ii) Vulnerability to debt trap: High interest means a larger part of the borrower's income goes towards repayment. In some cases, the amount to be repaid exceeds the borrower's income, leading to ever-increasing debt and a debt trap.

Source: Money and Credit, Formal Sector Credit in India

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• The question directly maps to the RBI supervision passage — quote or paraphrase its key lines.
• Two parts (i) and (ii) must be answered separately; examiners award marks for each.
• "Debt trap" must be explicitly named and briefly explained (repayment > income → growing debt).
• Avoid padding; 3 marks = roughly 3 distinct, pointed statements.