What are the differences between formal and informal sources of credit?
Answer:
Formal sources:
- These sources of credit are registered by the government and have to follow its rules and regulations.
- RBI supervises the functioning of formal sources of credit.
- They generally charge lower rates of interest.
- Their main motive is social welfare.
Example: Banks and cooperatives.
Informal sources
- These include those small and scattered units which are largely outside the control of the government.
- There is no organisation which supervises the credit activities.
- They charge much higher rates of interest.
- Their main motive is profit-making.
Example: Moneylenders, traders, employees, relatives and friends, etc.