Question

‘Formal sources of credit preferred over the informal source of credit’. Discuss the reasons
for it. Why do you think that the share of formal sector credit is higher for the richer
households compared to the poorer households?

Answer 1

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FORMAL SECTOR

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•We can get formal sector credit loans from Bank, LIC etc

•They are under the control of RBI

•If we don't pay the loan back the take legal action

•They give loan in reasonable interest

•Collateral is necessary

•This take more time for process

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INFORMAL SECTOR

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•We can get informal sector credit loans from Money lender, Trader, relatives etc

•They are not under the control of RBI

•If we don't pay back the loan they may take illegal action

•They give loan in high interest

•Collateral is not necessary ,it depends on the people's will and wish

•They actually don't take more time for the process

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