2. Objective:-
To learn about:
1-Formal source and Informal source of
credit.
2-Functions of R.B.I
3-Diference between formal and informal
source of credit.
4-Methods to reduce the dependence on
informal source of credit.
3. Sources of Credit
There are various sources of credit such as :
Moneylenders- 30%
Traders- 3%
Relatives and Friends- 7%
Cooperative societies- 27%
Commercial banks- 25%
Landlords- 1%
And Others - 7%
But, it can be conveniently grouped as
Formal Sector loans and Informal sector
loans.
4. Credit
Credit (loans) refers to the
agreement in which the lender
supplies the borrower with
money, goods or services in
return for the promise of future
payment.
5. Terms of credit
Collateral security
Documents required
Terms of the loan
Mode of repayment
Rate of interest
6. Collateral security
When the Lender feels, the security
provided by the Borrower is not sufficient
or it may be difficult to recover the dues
smoothly, the Lender may ask for
additional security to be provided by the
Borrower himself or other on behalf of the
Borrower. In case if any dispute or
failure to discharge the loan by the
Borrower, the collateral securities will
come in hand to service and recover the
loan/debt.
7. Importance of credit for
farmers in rural areas
•Farmers need credit to buy seeds ,
fertilizers pesticides , electricity ,
equipments , etc .
•There is a minimum period of three to
four months between the time when the
farmers buy these input sand when they
sell the crop .
• Farmers usually take crop loan sat the
beginning of the season and repay the
loan after harvest.
8. Formal source of credit
•Commercial Banks , cooperative societies and
Regional Rural Banks constitute the formal
sector of credit .
•The Reserve Bank of India (R.I.B) supervises
the functioning of formal sources of loans.
•They collect low rate of interest. They
follow some well defined rules and
procedures
9. Informal source of credit
•The informal lenders include money
lenders, traders, employers, relatives
and friends, etc.
•Thereis no organization which
supervises the credit activities of
lenders in the informal sector.
•They collect high-rate of interest.
•Theydo not follow any rules or
procedures.
10. Credit in Urban areas
•Poor takes 85% credit from Informal sources
and only 18% from banks and other formal
sources.
•Rich takes more than 90% of loans from
formal sources.
•So formal sources mostly serve the rich
people.
11. WHY ARE THE BANKS NOT ADVANCING
LOANS TO THE POOR PEOPLE?
•Poor people do not have anything to
offer as collateral security.
•Banks are not available in many rural
areas.
•Banks do not consider the poor people
as credit worthy.
•Poor and ignorant people find it
difficult to produce the needed
documents.
12. Methods to reduce the
dependence on informal source
of credit
•Banksand cooperative societies need to
lend more money , should establish their
branches in rural area to provide loans for
poor people at cheaper rates ,so that the
dependence on informal sources of credit
reduces in rural areas .
•While formal sector loans need to expand,
it is also necessary that everyone receives
these loans.
15. Question- 1
Informal source does not include:
a) Traders
b) Employers
c) Relatives and friends
d) Cooperatives
16. Question- 2
Moneylender is an example of :
a) Banks
b) Informal source of credit
c) Reserve bank of India
d) Formal source of credit
17. Question- 3
What is the function of R.B.I
a) Supervises the functioning of formal
sources of loans.
b) supervises the functioning of Informal
sources of loans.
c) Dealing with world bank.
18. Question- 4
Which households takes most loans from
formal sector institutions?
a)Poor households.
b)Rich households.
