Question 15 Marks
Explain the differences between Formal and Informal Sources of Credit.
Answer
View full question & answer→| Formal Sector Credit | Informal Sector Credit |
| These sources of credit are registered by the government and have to follow its rules and regulations. | These include those small and scattered units which are largely outside of the control of the government. |
| Formal sector credit includes banks and cooperatives. | Informal sector credit includes moneylenders, traders, employees friends and relatives. |
| Banks require collateral and proper documentation for getting a loan | No collateral required. |
| A reasonable rate of interest is charged. | They charge much higher rates of interest. Repeated borrowing can lead to a debt trap. |
| Apart from profit-making, they also have an objective of social welfare. | Their only motive is to extract profit as much as possible. |
| Terms of credit are fair and reasonable | They impose very tough and sometimes even unreasonable terms of credit on borrowers. |
| The Reserve Bank of India supervises its functioning. | Banks do not supervise. There is no organisation which supervises credit activities. |