What is formal and informal sector credit
Answers
Answer:
1. Sources : The sources of formal credit are - Commercial banks and Cooperative banks. The sources of informal credit are - friends & relatives, and Money lenders.
2. Rate of Interest : The rate of interest in formal sector is lesser than in informal sector.
3. Collateral : Collateral is required for borrowing from the formal sector while there is no requirement of collateral in informal sector.
4. Debt Trap : In case of formal sector there is less chance of getting into debt trap which means, to repay one loan, the borrower has to take another loan whereas there are maore chances of it in the formal sector.
5. Supervision : The formal sector is supervised by RBI while in the case of informal sector, there is no supervisor.
2) Credit - Credit refers to the loan given to borrower by any lender with an agreement to repay it with a sum of interest as a charge for using the money. Advantages of credit -
1. Credit helps people to purchase house, cars, tractors, pumping sets, farms, thressure machines, etc.
2. It helps a person to establish or extend his business
3. It earns an income for the bank by charging higher rate than that paid on the deposits.
4. It is used for crop production and other agricultural facilities.
Disadvantages of credit are -
1. It charges a very high rate of interest.
2. In case of failure of repay of credit, the bank has the right to sell the collateral.
3. If the loan is used for unproductive activities, then the borrower can be pushed into debt trap.
4. Banks do not provide a credit to a poor person without collateral.
3) Collateral - Collateral is the asset that the borrower deposits as a guarantee with the bank from which it is borrowing the credit. For example - lands, buildings, livestocks, vehicles, etc.
4) Terms of Credit - # A credit is an agreement between the lender (bank) and the borrower, it consists of terms of credit which is the rate of interest at which the credit is being given to the customer.
# The kind of interest rate being charged is either fixed or rating.
# The collateral, documentation and mode of repayment are to be deposited to the bank.
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