ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Local landlords and friends are examples of informal sources of credit. Banks and cooperatives are examples of formal sources of credit.

Detailed explanation-2: -85% of loans taken by the poor households in the urban areas are from informal sources. There is no organization that supervises the credit activities of lenders in the informal sector.

Detailed explanation-3: -Poor households still depend on informal sources of credit because: Bank loans require proper documentation and collateral which is rarely available with poor households. Informal sources of credit such as moneylenders know the borrowers personally and are often willing to give a loan without a collateral.

Detailed explanation-4: -Solution : Informal lenders are ones who are not regulated by the central bank such as RBI. Informal lenders give a loan at a higher rate. The local moneylenders, relatives, friends and finance companies that grant a loan to the people in need at higher interest rates are informal lenders.