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.