Question

What are the features of formal and informal sector loans?

Answer 1

Formal Sector Loans :
Formal sector loans include loans from banks and cooperatives. Features of formal sector loans are :
(i) Formal sectors provide cheap and affordable loans and their rate of interest is monitered by RBI.
(ii) Formal sector strictly follows the terms of credit which includes interest rate, collateral, documentation and the mode of repayment.
Informal Sector Loans :
Informal sector loans include loans from moneylenders, traders, employers, relatives, friends etc. Features for informal sector loans are :
(i) Their credit activities are not governed by any organisation, therefore they charge higher rate of interest.
(ii) Informal sector loan providers know the borrowers personally, and hence they provide loans on easy terms without collateral and documentation.

Answer 2

Formal Sector Loans: Include loans from banks  and cooperatives. Features of formal sector

Loans are :

(i) Formal sectors provide cheap and affordable  loans and their rate of interest are monitored by  Reserve Bank of India.

(ii) Formal sector strictly follows the terms of credit, which includes interest rate,  collateral, documentation and the mode of repayment.

Informal Sector Loans : Include loans from  moneylenders, traders, employers, relatives,  friends, etc. Features for informal sector loans are:

(i) Their credit activities are not governed by any  organisation, therefore they charge higher rate  of interest.

(ii) Informal sector loan providers know the  borrowers personally, and hence they provide  loans on easy terms without collateral and  documentation.