What are the Differences Between Formal and Informal Sources of Credit or Loans?

By Shivank Goel|Updated : August 26th, 2022

The difference between formal and informal sources of credit or loans is that the formal sources of credit are registered by the government, and the informal sources are not under Government's control.

The formal sources of credit are directly controlled by the government and are expected to follow the rules and regulations made by the government. Both the sources of credit are open to the public or customers. But, it is always safe to go with the government-regulated sources of loans as they are well-supervised and secured.

Formal and Informal Sources of Credit

Formal Sources

Informal Sources

Loans from banks and cooperatives

Loans from various sources such as money lenders, merchants, traders and employers etc.

Authorized by the government

Unauthorized sources

Supervised by RBI

Not supervised by any authority

Charge low-interest rates

Charge high-interest rates

The main aim is social welfare

The main aim is profit earning

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FAQs

  • The formal sources of credit are controlled by the government, such as banks and cooperatives.

  • The informal credit sources charge higher interest rates.

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