Difference Between Formal and Informal Sources of Credit in india
Moneylenders, traders, merchants, employers, and relatives are examples of informal sources of credit. There is no government management or control over the activities of informal credit sources. In addition, informal sources of credit include goldsmiths and merchants, who accept gold ornaments or brass-made plates as security. In addition, some employers offer unsecured loans through informal means. In addition, informal sources of credit include relatives and friends.
Moneylenders
In rural areas, moneylenders are commonplace, living in the same communes as their borrowers. These moneylenders often offer loans in cash or goods. Many moneylenders operate on a seasonal basis, and they offer flexible terms of payment without requiring collateral. The disadvantage of these loans is that they are typically high-interest and are subject to their own unique methods of collection to ensure repayment. In rural areas, moneylenders often earn high interest rates, but they do not report their loans to the government, so they are referred to as “black credit” by local households.
Goldsmiths
The goldsmiths were the first lenders of new money in Britain. They issued promissory notes as a form of payment for the precious metals deposited in their vaults. These notes could be assigned only to the original depositor and the goldsmith’s customer could collect his goods. As time passed, goldsmiths began to develop more sophisticated banking practices. Upon depositing money into their vaults, they issued promissory notes that were by law and custom considered loans to the goldsmith. The goldsmith could then advance the funds to customers and pay them back with a certain amount of time. These notes posed no risk to the goldsmith because the deposits were safe, and the loan amount could be repaid over a longer period of time.
Merchants
The two main types of sources of credit in India are formal and informal. A formal source is regulated by the Reserve Bank of India (RBI) while an informal source is run by individuals or small businesses that are not registered with the government. Both types of sources charge different rates of interest. The difference between formal and informal credit lies in the nature of the transactions. Informally provided credit tends to be shorter-term and may be used for a variety of uses, including consumption or capital. The use of informal sources of credit varies from household expenses, to agricultural inputs, buying livestock, land, small business ventures, education, and other purposes.
Employers
There are two main types of credit available in our society – formal and informal. Formal sources are banks and financial institutions that offer credit to borrowers. In contrast, informal sources can include individual traders, relatives, and friends. Both types of credit tend to charge higher rates of interest, and informal sources often exploit the borrower. In addition, informal sources are not regulated by any government body and are often cash-based.
Relatives
When it comes to obtaining funds, the distinction between formal and informal sources of credit is often unclear. Both types of credit involve a range of different interests and different transaction costs. Nevertheless, the informal sector is often associated with higher interest rates. This is primarily because informal lenders are often subject to monopoly. Moreover, informal sources of credit often lack government oversight, and lending policies can differ significantly between banks and nonbanks.
Friends
The term “credit” refers to two types of sources: informal and formal. Informal sources of credit include moneylenders, traders, employers, and friends. Most informal sources charge higher interest rates and exploit borrowers. Informal sources can be personal contacts, phone calls, letters, meetings, and any other form of communication. These sources usually don’t have formal agreements with employees. In contrast, formal sources can offer credit at a lower rate.
Others
There are two types of credit: formal and informal. Formal sources are registered with the government and supervised by the Reserve Bank of India, while informal sources are not. Informal sources of credit are mostly small scattered units with little or no oversight. The main purpose of informal sources is profit-making. While formal sources charge higher interest rates, they are cheaper to obtain. Both types are important. However, informal sources are more prevalent than formal ones.