Question

Difference b/w Formal and Informal sources of credit ?

Answer 1

Formal sector credit
1.The credit is provided by banks and cooperative societies to the borrowers
2.The RBI supervises the functioning of formal sector loans m
3.They provide cheap afforadable credit with common terms of credit for all .
4 They charge less interest rates as compared to informal sector
5.Proper terms of credit like collateral documentation ,rate of interest and mode of payment are followed



Informal sector
1.This credit is provided by traders ,money leaders , employer etc.
2.There is no government or private organisation which supervises the informal sector loans
3.Terms of credit are felxible for the personal benefit the leaders and pitiable condition of borrowers
4.They exploit the borrowers for their own benefits
5.Their rate of interest is much higher than that of formal sector......

Answer 2

Answer:

Formal sources:

(i) They follow those sources of credit, which are registered by the government and have to follow its rules and regulations.

(ii) RBI supervises the functioning of formal sources of credit.  

(iii) They generally charge lower rates of interest.

(iv) Their main motive is social welfare.

Example: Banks and cooperatives.

Informal sources:

(i) These include those small and scattered units which are largely outside the control of the government.

(ii) There is no organisation which supervises the credit activities.

(iii) They charge much higher rates of interest.

(iv) Their main motive is profit-making.

Example: Moneylenders, traders, employees, relatives and friends, etc.