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.