What are differences between formal and informal sources of credit?

cbse
economics
money-and-credit
cbse-class-10
cbse-class-10-social

#1

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.