Differentiate between formal sector loan and informal sector loan.

Question

Answer

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.Hope it helps..

Answer

Formal ways are better as there is less chance of getting looted. These are collateral loans. Whereas informal loan are not collateral and getting more chance of getting looted.

Answer

Formal sector take loan from commercial banks , cooperative societies and some terms of credit are must be  like collateral, mode of repayment, interest rate etc but in informal sector take loan from individuals, relatives, friends etc in high interest rates no terms of credit in this sector

Answer

Informal sector provide loan to poor whenever they are in need without any collateral assets but formal sector provide loan by taking collateral assets and it take long process and time to give moneyIf a person is having small part of cultivable land where he grow crops and small cottage where he live , how he can give collateral assets to formal sectors

Answer

9122098582

Answer

Formal Sector Loan

A formal sector loan refers to a loan that is provided by financial institutions such as banks, credit unions, or other regulated lenders. These loans have a structured application process, defined terms and conditions, and are governed by legal regulations. Here are some key characteristics of formal sector loans:

1. Regulation: Formal sector loans are subject to regulatory oversight by government authorities, ensuring compliance with established rules and regulations. This helps protect borrowers and maintain the stability of the financial system.

2. Documentation: Borrowers seeking formal sector loans are required to provide detailed documentation, including financial statements, tax returns, identity proof, and collateral (if applicable). These documents help lenders assess the borrower's creditworthiness and ability to repay the loan.

3. Interest Rates and Fees: The interest rates and fees for formal sector loans are typically fixed and determined by the lender based on various factors such as the creditworthiness of the borrower, prevailing market rates, and the loan amount.

4. Repayment Terms: Formal sector loans have predetermined repayment terms, including the loan tenure, installment amount, and frequency of repayment (monthly, quarterly, etc.). These terms are agreed upon by both the lender and borrower before the loan is disbursed.

5. Legal Protection: Borrowers who obtain formal sector loans benefit from legal protections, as the terms and conditions are legally binding. In case of any disputes or issues, borrowers have the option to seek legal recourse.

Informal Sector Loan

An informal sector loan, on the other hand, refers to a loan obtained from sources outside the formal financial system. These loans are usually provided by individuals, friends, family members, moneylenders, or other unregulated entities. Here are some key characteristics of informal sector loans:

1. Lack of Regulation: Informal sector loans are not subjected to regulatory oversight, which means the terms and conditions are not governed by legal regulations. This can result in higher risks for borrowers.

2. Limited Documentation: Informal sector loans often require minimal documentation compared to formal sector loans. Lenders in the informal sector may rely more on personal relationships and trust rather than extensive paperwork.

3. Flexible Interest Rates and Terms: The interest rates and repayment terms for informal sector loans are often negotiable and can vary widely. These terms are typically based on the lender's discretion and the borrower's negotiating power.

4. Collateral: Informal sector loans may or may not require collateral. In some cases, lenders may rely on the borrower's reputation or personal relationships as a form of security.

5. Lack of Legal Protection: Unlike formal sector loans, borrowers of informal sector loans have limited legal protection. Since these loans operate outside the regulatory framework, borrowers may face challenges in resolving disputes or seeking redressal in case of issues.

In conclusion, the main difference between formal sector loans and informal sector loans lies in their regulatory oversight, documentation requirements, interest rates, legal protection, and the source of lending. Formal sector loans provide borrowers with a more structured and regulated borrowing experience, whereas informal sector loans are characterized by flexibility and often rely on personal relationships and trust.

Top Courses for Class 10View all

Science Class 10

Social Studies (SST) Class 10

Mathematics (Maths) Class 10

English Grammar Advanced

English Grammar Basic

Top Courses for Class 10

Top Courses for Class 10

Suggested Free Tests

Related Content

About Class 10

Class 10 Study Material

Class 10 All Subjects

NCERT Textbook Solutions

Other Classes

Important Links

Company