How do formal and informal sources of credit differ from each other?

Formal sector:-

1. Rate of Interest is lower.
2. Collateral is must for getting loan.
3. RBI supervises them.
4. More documentation is required. Itinvolves many formalities.
5. Ex.: Banks and co-operatives.

Informal sector:-

1. Higher rate of Interest.
2. Ready to give loans without any collateral too.
3. No organization to supervise them
4. Less documentation, less formalities.
5. Examples: Moneylender, traders, friends, retailers and so on.

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