Question

why are formal credit source of credit prefers over the informal source of credit? give examples​

Answer 1

Explanation:

Formal sources of credit preferred over Informal sources of credit because:

i.Formal sources have low cost of borrowing ii.Higher Income through cheap borrowing

iii.No exploitation and debt trap.

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.

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