Explain the difference between the formal and informal sectors of loans.
Answer:
Answer to be written:
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Formal Sector |
Informal Sector |
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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 . |
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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. |
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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 . |
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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. |
