The document discusses formal and informal finance systems. The formal system includes licensed banks and institutions that primarily serve large businesses and governments. The informal system is unlicensed and provides savings and credit to small farmers, low-income households, and small businesses through simple and locally understood procedures. While the formal system has more resources, its complex requirements exclude many rural and poor clients, while the informal system fills this need with more accessible community-based services.

1. FORMAL AND
INFORMAL
FINANCE
SYSTEMS.
BY: Meghana.V.Kumar
SEM: V
COLLEGE: TOSA

2. INTRODUCTION
 Access to finance is the ability of individuals or enterprises to obtain
financial services, including credit, deposit, payment, insurance, and
other risk management services.
 Accumulated evidence has shown that financial access promotes
growth for enterprises through the provision of credit to both new and
existing businesses.
 It benefits the economy in general by accelerating economic growth,
intensifying competition, as well as boosting demand for labour.
 Financial services may be provided by a variety of financial
intermediaries that are part of the financial system. A distinction is
made between formal and informal providers of financial services,
which is based primarily on whether there is a legal infrastructure that
provides recourse to lenders and protection to depositors.

3. TIER DEFINITION INSTITUTIONS PRINCIPAL
CLIENTS
FORMAL
Specialized Non
bank financial
institutions
Formal system of
finance is licenced by
the Central bank.
Commercial and development
banks.
Rural banks, post bank, savings
and loan companies, savings and
loan companies.
Large businesses
government
Large rural enterprises,
salaried workers, small
and medium enterprises.
INFORMAL
Informal system of
finance is not licenced
by the Central bank.
Savings collectors, savings and
credit associations and
moneylenders.
The principal clients who
do informal finance are
either self-employed or
poor people.

4. FORMAL FINANCIAL SECTOR.
 Formal financial institutions often ignore small farmers, lower income
households, and small-scale enterprises in favour of large scale, well-off,
literate clientele who can satisfy their stringent loan conditions.
 Complex administrative services procedures are beyond the knowledge
and understanding of the rural masses and small savers.
 Formal financial institutions do not mobilize rural savings or small scale
deposits.
 Formal sector of institutions are selective regarding their clients, so as to
avoid clients who make only small deposits.
 Loan application procedures are very complex and needs reading and
writing skills so that a file on the borrower maybe established.
 The transaction costs are high and the repayment costs are low.
 The formal sector regularly has loanable funds available.
 The formal sector keeps written records on the activities of the clients.

5. INFORMAL FINANCIAL SECTORS
 The informal financial sector provides savings and credit facilities for
small scale farmers in rural areas, and the lower-income households and
small-scale enterprises in urban areas.
 The procedures of the informal schemes are usually simple and straight
forward as they emanate from local cultures and customs they are easily
understood by the population.
 The informal sector mobilises rural savings and small savings from low
income urban households.
 Informal groups operate on the days which are convenient for their
members.
 Informal sector associations accept any amount of regular savings,
even the most modest sums which a saver can afford to set it aside. The
financial techniques on which such informal groups are based lend
themselves to the management of a large number of small savings.
 Transaction costs are low and repayment costs are high.
 The interest paid on the deposits in informal sector compares favourably
with that paid in the formal sector, thus providing an incentive for rural
and small urban house holds to save.

6. INFORMAL FINANCIAL SECTORS
 The informal financial sector provides savings and credit facilities for
small scale farmers in rural areas, and the lower-income households and
small-scale enterprises in urban areas.
 The procedures of the informal schemes are usually simple and straight
forward as they emanate from local cultures and customs they are easily
understood by the population.
 The informal sector mobilises rural savings and small savings from low
income urban households.
 Informal groups operate on the days which are convenient for their
members.
 Informal sector associations accept any amount of regular savings,
even the most modest sums which a saver can afford to set it aside. The
financial techniques on which such informal groups are based lend
themselves to the management of a large number of small savings.
 Transaction costs are low and repayment costs are high.
 The interest paid on the deposits in informal sector compares favourably
with that paid in the formal sector, thus providing an incentive for rural
and small urban house holds to save.