Question

Why formal sources are better than informal sources?

Answer 1

There is no organisation which supervises the credit activities of lenders in the informal sector. They can lend at whatever interest rate they choose. There is no one to stop them from using unfair means to get their money back.

Compared to the formal lenders ,most of the informal lenders charge a much higher interest on loans. Thus the cost to the borrower of informal loans is much higher.

Answer 2

Answer:

hope it helps:

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People obtain loans from various sources. The various types of loans are grouped as formal sector loans and

informal sector loans.

Formal Source:

(i) These include loans from banks and cooperatives.

(ii) The Reserve Bank of India supervises the functioning of formal sources of loans.

(iii) The rich households avail cheap credit from formal lenders.

Informal Source:

(i) It includes moneylenders, traders, employers, relatives and friends, etc.

(ii) There is no organisation which supervises the credit activities of lenders in the informal sector. Compared to the formal lenders, most of the informal lenders charge a much higher interest on loans.

(iii) The poor households to pay a heavy price for borrowing from informal sources.

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