Question

What are the differences between formal and informal sources of credit?

Answer 1

The former are preferred by both credit sectors; thelatter are sometimes used only by informal credit sector. Each credit contract has a different setof terms that are established when granting the loan..
The informal sector has generated loan schemesthat are better suited to the revenue stream of the poor, which have led to higher repaymentrates. However, no major differences between repayment rates for informal loans granted for consumption versus formal loans granted for the production......

Answer 2

Answer:

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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: