Question

difference between informal and formal loan,with 5 to 4 minimum

Answer 1

. The informal financial sector provides 1. Formal financial institutions ignore small savings and credit facilities for small farmers, lower-income households, and small- farmers in rural areas, and for lower- scale enterprises in favour of a larger-scale, income households and small-scale well-off, and literate clientele which can enterprises in urban areas. satisfy their stringent loan conditions. 2. The procedures of informal schemes are 2. Complex administrative procedures are beyond usually simple and straightforward; as the understanding of the rural masses and small they emanate from local cultures and savers. customs, they are easily understood by the population. 3. The informal sector mobilises rural 3. Formal financial institutions do not mobilize savings and small savings from low-income rural savings or small-scale deposits. Commercial urban househods. banks could contribute to rural and small savings mobilization if they had adequate branch networks and if they adopted the relevant procedures.

Answer 2

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.