What Are the Two Categories of Sources of Credit? Mention Four Features of Each.

The two categories of sources of credit are formal sector credit and informal sector credit.

Four features of formal sector credit are:

1. Formal sector credit sources includes banks and cooperatives.
2. Mostly people in the urban areas and the well-off households use it.
3. Formal sector credit need proper documents and collateral before lending.
4. They charge less rate of interest in comparison to that of informal sector. Thus the cost of borrowing is less.

Four features of informal sector credit are:

1. Informal sector credit sources includes moneylenders, friends, relatives, traders etc.
2. Mostly people in the rural areas and the poor households use it. Many a times informal sector don’t ask for documents and collateral as they know the borrowers personally.
3. They charge high rate of interest in comparison to that of formal sector. Thus the cost of borrowing is high.
4. Due to high cost of borrowing, the borrowers have to repay more and they will have less saving, which will hinder individual economic development.