Question

'Formal sector of credit better than informal sector.' Give arguments in support of your answer.

Answer 1

The formal sector of credit is better than the informal sector due to the following reasons:
1. Regulated System: Formal credit sources, like banks and cooperatives, are regulated by government authorities such as the RBI, ensuring transparency.
2. Lower Interest Rates: Banks offer loans at lower and fixed interest rates compared to the informal sector, which charges exorbitant rates.
3. Legal Protection: Borrowers in the formal sector are protected by laws, whereas informal sector lenders may exploit borrowers.
4. Documentation and Accountability: Formal credit requires proper documentation, ensuring systematic loan distribution.
5. Financial Inclusion: The formal sector supports economic development by offering credit for education, business, and agriculture.