Question

What are the different sources of credit in India? Describe.

Hint:

Structure the answer as Formal vs Informal. Under each, name 3–4 concrete sources and add one line on features or pros/cons.

Answer 1

Broad Classification: Credit sources in India can be grouped into formal and informal sectors.
A. Formal Sources
1. Commercial Banks (Public & Private): Provide savings/current accounts, term loans, education/home/vehicle loans, Kisan Credit Cards (KCC), overdrafts, and MSME finance; regulated by RBI with transparent interest rates.
2. Regional Rural Banks (RRBs): Focus on rural and agricultural lending, often working with cooperative institutions.
3. Cooperative Credit Institutions: State/District Cooperative Banks, Primary Agricultural Credit Societies (PACS) offering crop loans and input credit to farmers.
4. Development Finance/State Financial Corporations & NABARD support: Medium/long-term finance for agriculture, rural infrastructure and small industries (often refinance/back-end support).
5. NBFCs & Microfinance Institutions: Provide retail, vehicle, gold and small enterprise loans; MFIs extend group-based microcredit, often to women.
6. Self-Help Groups (SHGs)–Bank Linkage: Savings-cum-credit groups that access bank loans collectively, enabling small, collateral-light borrowing.
7. Post Office Savings/Small Savings linked advances (limited): Some tie-ups/products for small borrowers.
B. Informal Sources
1. Moneylenders: Quick, collateral-light loans but often at high interest; flexible repayment.
2. Traders & Commission Agents: Advance against future produce/sales, may lead to interlinked credit and dependency.
3. Employers/Relatives/Friends: Short-term, trust-based borrowing; terms are flexible but undocumented.
4. Chit Funds/Rotating Savings Associations: Periodic contributions with lump-sum payout; risk depends on governance.
Comparison (Key Points):
- Formal sector is regulated, written contracts, lower interest, greater consumer protection but stricter documentation and collateral.
- Informal sector is unregulated, faster access and flexible but costlier and prone to exploitation.
Conclusion:
A healthy credit ecosystem blends formal expansion (financial inclusion, SHG–bank linkage, digital payments, credit bureaus) with consumer protection to reduce dependence on high-cost informal borrowing.