Explain the difference between the formal and informal sectors of loans.



Answer to be written:

Formal Sector

Informal Sector

The RBI supervises the functioning of formal sources of loans .

There is no organisation which supervises the credit activities of lenders in the informal sector .

RBI monitors the banks in actually maintaining cash balance and sees that banks give loans not just to profit-making businesses and traders but also to small cultivators , small-scale industries , small borrowers etc.

In the informal sector moneylenders, traders and employers can lend to anyone at whatever interest rate they want.

Banks have to submit information to the RBI on how much they are lending to whom at what interest rate , etc.

There is no one to stop informal lenders from using unfair means to get their money back .

Interest rates are limited and are decided by the RBI.

Compared to formal lenders, most informal lenders charge much higher interest on loans. Thus, the cost of informal loans to the borrowers is much higher.


Ask a doubt
Davneet Singh's photo - Co-founder, Teachoo

Made by

Davneet Singh

Davneet Singh has done his B.Tech from Indian Institute of Technology, Kanpur. He has been teaching from the past 14 years. He provides courses for Maths, Science, Social Science, Physics, Chemistry, Computer Science at Teachoo.