Question

Advantages and disadvantages of informal sector of credit

Answer 1

Heya friend,

Here is it :

Credit - It is an agreement between the lender and the borrower which ensures that the borrower repays the taken amount within the specified period of time.

It is of two types -

1. Formal source of credit

2. Informal source of credit

Informal credit - The agreement done through informal  sources like family relatives , landowners etc. is known as informal credit.

Advantages of informal credit :-

1 ) There is no collateral required in such cases.

2 ) There is no legal documentation required in this process and hence it is a fast process .

3 )  This practice is commonly followed by poor people who generally fail to arrange collateral or are not accessible to banks.

Disadvantages of informal credit :-

1 ) The interest rate laid by such lenders can be very high as there is no control over the interest of rate as done in banks through RBI.  

2 ) The lender can threaten and exploit the borrowers who are generally the poor people.

3 ) There can be any violation of rule in this case and if the borrower fails to pay the required amount, he/she can even fall into debt trap.

Thanks,

Manav

Answer 2

Answer:

This is what I know

Explanation:

Disadvantages are:

1 ) The interest rate laid by such lenders can be very high as there is no control over the interest of rate as done in banks through RBI.

2 ) The lender can threaten and exploit the borrowers who are generally the poor people.

Advantages are:

1 ) There is no collateral required in such cases.

2 ) There is no legal documentation required in this process and hence it is a fast process .

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