Question

Distinguish between formal and informal sources of credit

Answer 1

Solution:

Formal sources of credit come under the organised sectors like banks, corporate sectors and financial institutions.

Informal sources of credit on the other hand are availed through relatives, friends and many more.

Collateral documents are required for getting formal credits while informal sources do not require such documents to avail credit.

Solution: Formal sources of credit come under the organized sectors like banks, corporate sectors and financial institutions.

Informal sources of credit on the other hand are availed through relatives, friends and many more.

Collateral documents are required for getting formal credits while informal sources do not require such documents to avail credit.

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.