Login

1) DIFFERENCE BETWEEN FORMAL AND INFORMAL SOURCE OF CREDIT?

2)WRITE SHORT NOTE ON:

a)credit

b)collateral

c)terms of credit

Here it goes -

1)  1. Sources : The sources of formal credit are - Commercial banks and Cooperative banks. The sources of informal credit are - friends & relatives, and Money lenders.

2. Rate of Interest : The rate of interest in formal sector is lesser than in informal sector.

3. Collateral : Collateral is required for borrowing from the formal sector while there is no requirement of collateral in informal sector.

4. Debt Trap : In case of formal sector there is less chance of getting into debt trap which means, to repay one loan, the borrower has to take another loan whereas there are maore chances of it in the formal sector.

5. Supervision : The formal sector is supervised by RBI while in the case of informal sector, there is no supervisor.

 

2) Credit - Credit refers to the loan given to borrower by any lender with an agreement to repay it with a sum of interest as a charge for using the money. Advantages of credit -

1. Credit helps people to purchase house, cars, tractors, pumping sets, farms, thressure machines, etc.

2. It helps a person to establish or extend his business

3. It earns an income for the bank by charging higher rate than that paid on the deposits.

4. It is used for crop production and other agricultural facilities.

Disadvantages of credit are  -

1. It charges a very high rate of interest.

2. In case of failure of repay of credit, the bank has the right to sell the collateral.

3. If the loan is used for unproductive activities, then the borrower can be pushed into debt trap.

4. Banks do not provide a credit to a poor person without collateral.

3) Collateral - Collateral is the asset that the borrower deposits as a guarantee with the bank from which it is borrowing the credit. For example - lands, buildings, livestocks, vehicles, etc.

4) Terms of Credit - # A credit is an agreement between the lender (bank) and the borrower, it consists of terms of credit which is the rate of interest at which the credit is being given to the customer.

# The kind of interest rate being charged is either fixed or rating.

# The collateral, documentation and mode of repayment are to be deposited to the bank.

  • 25
View Full Answer

formal sector is mainly owned by banks but informal is owned by landowners

  • -1

1)  1. Sources : The sources of formal credit are - Commercial banks and Cooperative banks. The sources of informal credit are - friends & relatives, and Money lenders.

2. Rate of Interest : The rate of interest in formal sector is lesser than in informal sector.

3. Collateral : Collateral is required for borrowing from the formal sector while there is no requirement of collateral in informal sector.

4. Debt Trap : In case of formal sector there is less chance of getting into debt trap which means, to repay one loan, the borrower has to take another loan whereas there are maore chances of it in the formal sector.

5. Supervision : The formal sector is supervised by RBI while in the case of informal sector, there is no supervisor.

 

2) Credit - Credit refers to the loan given to borrower by any lender with an agreement to repay it with a sum of interest as a charge for using the money. Advantages of credit -

1. Credit helps people to purchase house, cars, tractors, pumping sets, farms, thressure machines, etc.

2. It helps a person to establish or extend his business

3. It earns an income for the bank by charging higher rate than that paid on the deposits.

4. It is used for crop production and other agricultural facilities.

Disadvantages of credit are  -

1. It charges a very high rate of interest.

2. In case of failure of repay of credit, the bank has the right to sell the collateral.

3. If the loan is used for unproductive activities, then the borrower can be pushed into debt trap.

4. Banks do not provide a credit to a poor person without collateral.

3) Collateral - Collateral is the asset that the borrower deposits as a guarantee with the bank from which it is borrowing the credit. For example - lands, buildings, livestocks, vehicles, etc.

4) Terms of Credit - # A credit is an agreement between the lender (bank) and the borrower, it consists of terms of credit which is the rate of interest at which the credit is being given to the customer.

# The kind of interest rate being charged is either fixed or rating.

# The collateral, documentation and mode of repayment are to be deposited to the bank.

  • 1

1.

 

 

 

Formal

Informal

·  These resources work under supervision of Reserve Bank of India.

·  The rate of interest is very low.

·  Commercial banks, cooperative societies etc are examples of formal credit.

·  These do not work under any government

organization.

·  The rate of interest is very high.

·  Relatives, moneylenders etc are examples of informal credit.

 

 

 

 

 

 

 

 

 

 

 

2.

 

Credit : It refers to an agreement in which the lender supplies the borrower with money , goods or services in return for the promise of future payment.

 

 

Collateral : refers to an asset that a borrower uses as a guarantee to secure a loan. The lender has the right to sell the collateral to obtain payment in case the borrower defaults on the loan and fails to pay it.

 

 

 

Terms of credit : Interest rate , collateral and documentation along with mode of repayment together comprise what is called terms of credit.

The four terms of credit are :

1 Interest rate- The borrower has to pay a sum of money as interest along with the principal amount.

2.Collateral- It is an asset that the borrower owns and uses this as guarantee to the lender until the loan is repaid.

3. Documentation- Proper documents of borrowing with all the terms and conditions must be submitted.

4. Mode of repayment - The mode through which the borrower will repay the loan must be clearly mentioned.

  • 7
What are you looking for?