Mention any three points of distinction between formal sector loans and informal sector loans

Mention any three points of distinction between formal sector loans and informal sector loans.

FORMAL sector loan include banks and cooperatives whereas, the informal lenders includes money lenders, traders, employees, relatives and friends.

  • The Reserve Bank of India supervises the functioning of formal sources loans but there is no organisation which supervises the credit activities of lenders in the informal sector.
  • Compared to the formal lenders, most of the informal lenders charge much higher interest on loans.
  • Formal sources of loan are less risky. They do not use unfair means to get their money back whereas, informal lenders use different crucial methods to get their money back.
  • Banks require documentation and collateral whereas, the loans from informal sources do not require any such collateral.
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