The credit activities of the informal sector should be discouraged because :
(i) 85% of loans taken by the poor households in the urban areas are from informal sources.
(ii) Informal lenders charge very high interest on their loans.
(iii) There are no boundaries and restrictions.
(iv) Higher cost of borrowing means a larger part of the earnings of the borrowers is used to repay the loan.
(v) In certain cases, the high interest rate for borrowing can mean that the amount to be repaid is greater than the income of the borrower.
(vi) This could lead to increasing debt and debt trap, therefore the credit activities of the informal sector should be discouraged.