Why are formal sources of credit preferred over the informal sources of credit give reason?
Answers
Formal sources of credit prefer over informal because final sources comprises of government organizations and collateral security, lower interest rates on its loans like co- operative bank & RBI but Informal sources comprises higher Interest on its loans does not provide collateral security & no organisation to supervise this sector ex- friends,relatives,money landers & etc.
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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