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Sources of credit:

Formal sector

  • 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

Informal sector

  • 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.

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