Question

Merits and demerits of formal sector of india

Answer 1

The advantages of a formal loan is that the bank or credit union who is granting the loan, has minimum chances of suffering financial loss because of nonpayment or because the customer committed fraud.

The credit union or bank may have a collateral to back up a nonpayment in case something happens that would rend the customer unable to pay.

The customer can rest assured that the money he was lend is legitimate and there are no risks later on that the money came from a fraudalent and corrupted financial company.

The bank or the credit union are able to grant a large amount of money in loan for a customer.

The customer will pave the way to build a strong credit history of worthiness which will open the doors in many places in the future if he pays the loan successfully.

Answer 2

Answer:

Three merits of formal sector credit are :

1. It provides loan at a reasonable and less interest rate.
2. Proper terms of credit are taken and the documents are secured so that the borrower didn't fall in any debt trap.
3. The RBI (Reserve Bank of India) has to check the formal sources of credit and ensures that proper interest are given to small cultivators, workers etc and no special privileges to rich people.

Two Demerits of formal sector credit are :

1. Poor people usually don't have collateral that would provide them loans from formal sector.
2. The terms of credit cannot vary if the loan is taken.