Formal and Informal Sources of Credit

Core concept

Formal sources of credit, like banks and cooperative societies, are regulated by the Reserve Bank of India, offering relatively lower interest rates and legal protections for borrowers.

How it works

Informal sources of credit, like moneylenders, relatives, or traders, often provide easier access to loans but typically charge much higher interest rates and offer fewer protections.

Why it matters

Many poor and rural households still depend heavily on informal credit sources due to limited access to formal banking or difficulty meeting formal loan requirements.

Key detail

Government efforts, like promoting microfinance and expanding rural banking access, aim to increase formal credit availability, reducing dependence on costly informal credit sources.