Economics
What are the differences between formal and informal sources of credit?
Money & Credit
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Answer
| Formal sources of credit | Informal sources of credit |
|---|---|
| These are loans from banks and cooperatives. | These include moneylenders, traders, employers, relatives and friends. |
| The Reserve Bank of India supervises the functioning of formal sources of loans. | There is no control or supervision. |
| They offer structured lending products with defined terms, conditions, and repayment schedules. | Terms and conditions vary according to the lenders' wish. |
| The terms are fixed and do not change from person to person. | Informal sources often offer flexible terms as per the need of borrower. |
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Related Questions
Tick the correct answer.
(i) Over the years, Rama’s debt
- will rise.
- will remain constant.
- will decline.
(ii) Arun is one of the few people in Sonpur to take a bank loan because
- other people in the village prefer to borrow from the moneylenders.
- banks demand collateral which everyone cannot provide.
- interest rate on bank loans is same as the interest rate charged by the traders.
Talk to some people to find out the credit arrangements that exist in your area. Record your conversation. Note the differences in the terms of credit across people.
Why should credit at reasonable rates be available for all?
Should there be a supervisor, such as the Reserve Bank of India, that looks into the loan activities of informal lenders? Why would its task be quite difficult?