Explain the advantages and disadvantages of formal and informal sources of credit?
The formal sources of credit are the banks and the cooperatives. They are controlled by the Reserve Bank of India. The rate of interest at which the banks lend loans are also controlled. They involve collateral security, and various procedures which are time taking.
The informal sources of credit are the moneylenders, traders, employers, relatives and friends. No external organisations control the credit activities of lenders. The rate of interest can be really high as it depends on the wishes of the lender. They can also use unfair means to get their money back.
Comparatively, informal sources of credit are more popular than formal sources.
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Formal sector consists of loans from bank and cooperatives. These loans are supervised by the RESERVE BANK OF INDIA. here the terms of credit are fixed and the interest rates are not too high.
Informal sector consists of loans from moneylenders , relatives, landlords , friends etc. They are not under the control of REserve Bank of India and the interest rates are too high.