Question

Explain the advantages and disadvantages of formal and informal sources of credit?

Answer 1

Formal sources of credit

Banks and cooperatives are the formal sources of credit.

Advantages

1. These institutions are regulated by the Reserve Bank Of

India. Their rates of interest for loans are controlled. The rates and terms

are fixed.

2. There is no exploitation by the lenders.

3. Everyone can take a loan that includes big businessmen as

well as the small cultivators or borrowers.

4. The cost of borrowing is usually less.

Disadvantages

1. The procedure to get the loan is time consuming.

2. They require collateral security.

 

Informal sources of credit

Landlords, traders, moneylenders, employers, friends and

relatives are informal sources of credit.

Advantages

1. No external control over the lending practices.

2. Suitable for poor households.

Disadvantages

1. The interest rates can be very high.

2. The lenders can use unfair means to get the money back

Answer 2

Answer:

Formal source of credit:

(a)  Loans that are given by banks and co-operative institutions are called Formal sector of credit.

(b)  The functioning of these banks and co-operative institutions are supervised by Reserve Bank of India- RBI.

(c)  These institutions are required to report to the RBI the rate of interest, amount lending, etc.

(d)  Borrower is required to submit collaterals and documents.

Informal source of credit:

(a)  Loans that are given by money lenders, friends and relatives are called Informal source of credit.    

(b)  They are not supervised by Reserve Bank of India - RBI.

(c)  They can lend money at any interest rate and use any means to get back their money.

(d)  Borrower is not required to submit collaterals and documents.

Explanation: