Correct Option
The correct option is 1 only
Explanation
A Debt Trap is a situation where a borrower is unable to repay a loan because the interest payments exceed their income or ability to pay, forcing them to borrow further to service the existing debt. This creates a vicious cycle of indebtedness.
Statement-wise Analysis:
- Statement 1 is Correct: A debt trap is defined as a situation where credit pushes the borrower into a condition from which recovery is very painful. Instead of improving the borrower's financial status, the liability increases, leading to distress.
- Statement 2 is Incorrect: A debt trap is most likely to occur in high-risk activities (such as agriculture dependent on uncertain rainfall). In such cases, if the activity fails (e.g., crop failure), the borrower has no means to repay the loan and must sell assets or borrow more, worsening their situation. In low-risk activities, repayment is generally more certain.
- Statement 3 is Incorrect: The debt trap is a more common outcome of borrowing from informal sources (such as moneylenders, traders, or landlords) due to exorbitant interest rates and unfair repayment terms. Formal sources like banks operate under regulations with lower interest rates, making a debt trap less likely compared to informal lending.
Key Takeaway:
A Debt Trap typically arises from high-interest informal credit or high-risk investments where income generation is insufficient to cover repayment, leading to a cycle of perpetual debt.