Question

Why do people prefer to take loan from informal sources of credit rather than formal sources of credit?​

Answer 1

Banks and cooperatives are the main formal sources of credit. The credit from the informal source is getting loans from institutions that do not come under the purview of any legal entity. Thus only less income would be left with them after paying their loans back. Thus the savings with them would be minimal.

Answer 2

People in India generally prefer borrowing from informal sources of credit because the process of borrowing from formal sources is very complicated.

Explanation:

1. Formal sources of credit in India include banks and financial institutions. Informal sources include private moneylenders, family, friends, etc.
2. People generally prefer borrowing money from informal source of credit because the process of borrowing money is quite simple and less time-consuming in the case of informal sector.
3. On the contrary, the process of borrowing from formal source is quite time consuming.