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Formal & Informal Sectors of Credit Video Lecture | Social Studies (SST) Class 10

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FAQs on Formal & Informal Sectors of Credit Video Lecture - Social Studies (SST) Class 10

1. What is the difference between the formal and informal sectors of credit?
Ans. The formal sector of credit refers to the regulated financial institutions such as banks and cooperatives that provide credit to individuals and businesses. On the other hand, the informal sector of credit includes moneylenders, friends, relatives, and other non-institutional sources that provide credit without any legal framework or regulation.
2. What are the advantages of borrowing from the formal sector of credit?
Ans. Borrowing from the formal sector of credit has several advantages. Firstly, the interest rates charged by formal institutions are usually lower compared to the informal sector. Secondly, the formal sector provides a legal framework and documentation for the credit transaction, ensuring transparency and protecting the rights of borrowers. Additionally, borrowing from the formal sector helps in building a credit history, which can be beneficial for future credit needs.
3. Why do people opt for borrowing from the informal sector of credit?
Ans. People often opt for borrowing from the informal sector of credit due to various reasons. Firstly, the informal sector is easily accessible, especially in rural areas where formal institutions may not have a presence. Secondly, the informal sector may not have strict eligibility criteria or lengthy documentation processes, making it easier for individuals with limited financial resources to borrow. However, it is important to note that borrowing from the informal sector often comes with higher interest rates and risks.
4. What are the disadvantages of borrowing from the informal sector of credit?
Ans. Borrowing from the informal sector of credit has certain disadvantages. Firstly, the interest rates charged by moneylenders and other non-institutional sources are generally higher compared to formal institutions. This can lead to a debt trap for borrowers, especially those with limited income or assets. Secondly, the lack of legal framework and documentation in the informal sector makes it difficult to resolve disputes or protect the rights of borrowers.
5. How can the formal sector of credit be made more accessible to marginalized sections of society?
Ans. To make the formal sector of credit more accessible to marginalized sections of society, certain measures can be taken. Firstly, financial literacy programs can be conducted to educate individuals about the benefits and processes of borrowing from formal institutions. Secondly, the government and financial institutions can introduce special schemes and subsidies to provide credit at affordable rates to marginalized sections. Additionally, simplifying the documentation process and reducing the eligibility criteria can also help in making the formal sector more inclusive.
78 videos|503 docs|131 tests

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