This would lead to higher incomes and many people would then be able to borrow cheaply for a variety of needs. They could cultivate, do business, build small industries, etc. They could start new industries or trade goods. Cheap and affordable loans are crucial for the country`s development. 2. The credit activities of the sector supervised by the Reserve Bank of India. The Reserve Bank of India oversees the operation of formal sources of credit. For example, we have seen banks maintain a minimum cash balance from the deposits they receive. The RBI monitors that the banks actually hold the cash balance. 5. Informal sources of credit include lenders, merchants, lenders, relatives and friends. 1.
There is a need for banks and cooperatives to increase their lending, especially in rural areas, in order to reduce dependence on informal sources of credit. 1. The formal sources of credit are banks and cooperatives. There is no organization that oversees the lending activities of lenders in the informal sector. You can make loans at any interest rate you choose. No one is stopping them from using unfair means to get their money back. Compared to formal lenders, most informal lenders charge much higher interest rates on loans. 2.
Although formal sector loans need to be expanded, it is also necessary for everyone to receive these loans. 3. It offers credit to everyone at a low interest rate. Thus, the cost to the borrower of informal loans is much higher. Higher borrowing costs mean that more of borrowers` income is used to repay the loan. As a result, borrowers have less income for themselves (as we saw for Savitri in Sonpur). In some cases, the high interest rate on the loan can cause the amount to be repaid to be higher than the borrower`s income. Who gets what? The graph shows the importance of formal and informal sources of credit for people living in urban areas. People are divided into four groups, from the rich to the poor, as the graph shows.
You can see that 85% of loans taken out by poor households in urban areas come from informal sources. 4. It is a better source of credit than informal sources of credit. Compare that to wealthy urban households. What do you think? Only 10% of their loans come from informal sources, while 90% come from formal sources. A similar trend can also be observed in rural areas. Rich households take out cheap loans from formal lenders, while poor households have to pay a high price to borrow. (a) Loans granted by banks and cooperatives are referred to as the formal credit sector. Currently, it is the richest households that receive formal loans, while the poor depend on informal sources. It is important that formal credit be distributed more evenly so that the poor can benefit from cheaper loans. The bad impact of informal sources of credit on borrowers is mentioned below Let`s discover formal sector lending in India.
Sources of formal loans include loans from banks and cooperatives. Informal lenders include lenders, traders, employers, relatives and friends, etc. What does all this say? First, the formal sector still covers only about half of the total credit needs of the rural population. Other credit needs are covered by informal sources. Most loans from informal lenders have a very high interest rate and do little to increase borrowers` incomes. 6. Informal sources of credit exploit people by charging exorbitant interest rates. What are the differences between formal and informal sources of credit? (c) These institutions are required to communicate to the RBI the interest rate, the amount of the loan, etc. 3.
The higher cost of borrowing suggests that much of the borrowers` income is used to repay the loan. You will have less income left for yourself. Similarly, the RBI finds that banks lend not only to profitable businesses and traders, but also to small producers, small commercial industries, small borrowers, etc. At regular intervals, banks are required to provide the RBI with information on the amount they lend, to whom, at what interest rate, etc. 4. Those who want to start their own business by borrowing may not be able to do so due to these high costs. (d) The borrower is required to provide guarantees and documents. . This could lead to an increase in debt (as we saw for Rama in Sonpur) and a debt trap. Even people who want to start a business by borrowing cannot do so because of the high cost of borrowing.
For these reasons, banks and cooperatives need to lend more. . b) They are not supervised by the Reserve Bank of India – RBI. . (c) You can lend money at any interest rate and use any means to get your money back. (b) The operation of these banks and cooperative institutions is supervised by the Reserve Bank of India (RBI). .
