Analyse any two features each of formal sector loans and informal sector loans

Analyse any two features each of formal sector loans and infoimal sector loans.

Features of Formal sector loans:

  • Bank and cooperative societies come under the formal sector. One can obtain loans after completing required formalities.
  • Bank loans require documentation and collateral. Collateral is used as a guarantee to the lender until the loan is paid back.
  • The Reserve Bank of India supervises the functioning of formal sources of loans. Not only this, the RBI sees that the banks give loans not just to profit-making business and traders but also to small cultivators, small scale industries to small borrowers, etc.
  • They charge low rate of interest on loans.

Features of Informal sector loans:

  • Money lenders, traders, Employers, relatives, friends, landlords etc. come under the informal sector.
  • Generally, collateral is not desirable because of money lenders know the borrowers personally and hence, are often willing to give a loan without collateral.
  • 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.