Money and Credit

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• Questions
• Summary

1. The various types of loans can be conveniently grouped as formal sector loans and informal sector loans.
2. Formal credit is generally available with the banks and cooperatives. They charge lesser rates of interest than informal institutions. The Reserve Bank of India (RBI) supervises the functioning of formal sources of loans.
3. Informal lenders include moneylenders, traders, employers, relatives and friends etc. They charge much higher interest on loans. There is no one to stop them from using unfair means to get their money back.
4. As cheap and affordable credit is crucial for the country's development therefore, banks and cooperative societies need to lend more.

Formal and Informal Credit: Who gets that?

1. 85% of the loans taken by poor households in the urban areas are from informal sources.
2. Rich urban households take only 10% of their loans from informal sources, while 90% are from formal sources. A similar pattern is also found in rural areas.
3. In a current scenario, It is the richer households who receive formal credit whereas the poor have to depend on the informal sources.
4. It is important that the formal credit is distributed more equally so that the poor can benefit from the cheaper loans.
5. It is necessary that banks and cooperatives increase their lending, particularly in the rural areas, so that the dependence on informal sources of credit can be reduced.
6. While formal sector loans need to expand, it is also necessary that everyone receives these loans.