Question

Explain diffirent sources of Formal and Informal credit

Answer 1

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.

Answer 2

Taking loans from friends,relatives & money lenders is called informal credit.
Money borrowed from banks and by other cooperative sectors is called formal credits.