Question

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

Answer 1

Formal credit is preferable to informal credit for these reasons:
1. Regulation: Formal sources (banks, cooperatives) are overseen by bodies like the RBI, promoting transparency.
2. Reduced Interest: Banks provide loans at lower, fixed interest rates, unlike the informal sector's high rates.
3. Legal Safeguards: Formal borrowers are legally protected; informal lenders may be exploitative.
4. Documentation: Formal credit requires documentation, ensuring organized loan distribution.
5. Economic Support: The formal sector fosters economic development by offering credit for education, business, and agriculture.