Formal sources: (i) They follow those sources of credit, which are registered by the government and have to follow its rules and regulations. (ii) RBI supervises the functioning of formal sources of credit. (iii) They generally charge lower rates of interest. (iv) Their main motive is social welfare. Example: Banks and cooperatives. Informal sources: (i) These include those small and scattered units which are largely outside the control of the government. (ii) There is no organisation which supervises the credit activities. (iii) They charge much higher rates of interest. (iv) Their main motive is profit-making. Example: Moneylenders, traders, employees, relatives and friends, etc Two types of credit market: informal and formal • Formal market: banks (commercial or government), credit bureaus, etc. o Problem: often require collateral because of limited liability, which poor peasants can’t provide • Informal market: individuals o Can accept less traditional forms of collateral-- large landowner adjacent to poor farmer o Can more easily monitor each other
Posted on: Sun, 20 Jul 2014 13:44:20 +0000