Sources of credit:
The Reserve bank of India supervises the functioning of formal sources of loan.
Includes loans from banks and cooperatives.
These sources are registered with the government
Interest rate charged is less
There is no organization which supervises the credit activities of lenders in the informal sector.
They can lend at whatever interest rate they choose. Interest rate is generally very high as compared to formal sources.
They can use unfair means to get their money back.
Higher cost of borrowing means a larger part of the earnings of the borrowers is used to repay loan.
Loan activities in India:
85% of the loans taken by poor households in urban areas are from informal sector.
90% of the loans taken by rich households are from formal sector.
A similar pattern is found in rural households also.
It is a serious issue that rich households are getting cheap credit from formal sources whereas the poor households have to pay a heavy price for borrowing.
Therefore, it is necessary that banks and co-operatives increase their lending in the rural areas , so that the dependence on informal sources of credit reduces.
Also , while formal sector loans need to expand, it is necessary that everyone receives these loans. Poor people should also be able to take formal source loans.