Question

Distinguish between formal and informal sources of credit.

Analyse the differences between formal and informal sectors of credit.

Answer 1

Formal sector of credit	Informal sector of credit
RBI monitors the formal sector of credit.	There is no organisation which supervise the credit activities of lenders.
They charge a normal interest rate on loans.	They can lend at whatever interest rate they choose.
E.g., Banks and cooperative societies.	E.g., Local money lenders, traders and relatives etc.

Answer 2

Aspect	Formal sector of credit	Informal sector
Regulation	Regulated by the RBI and government	No government regulation
Interest Rates	Low and fixed by RBI guidelines	High and varies according to lender
Borrower Protection	Legal protection and transparency	No legal protection, risk of exploitation
Accessibility	Limited in rural areas due to formalities	Easily available, especially in villages
Repayment Terms	Fixed EMIS and structured repayment	Often flexible but may involve coercion
Impact on Borrowers	Encourages financial stability	Can lead to debt traps and exploitation
Loan Procedure	Requires documentation and collateral	No formal procedures, often based on verbal agreement
Example	Banks, Cooperatives, Government Institutions	Moneylenders, Traders, Relatives, Landlords