Question

Why are formal source of credit preferred over the informal source of credit? (3 marks)

Answer 1

Formal source of credit which includes loans from Bank Cooperative need to be expanded in India to save the poor household from exploitation informal source of credit there is no organisation to supervise this type of credit activities from lenders therefore they charge a higher interest on loans and people may fall to d e p t trap on the other hand formal source work under the supervision of RBI RBI ceased that Bank give loans to small borrowers also therefore is great need to expand formal sources of credit.

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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