The two categories of sources of credit are formal sector credit and informal sector credit.
Four features of formal sector credit are:
- Formal sector credit sources includes banks and cooperatives.
- Mostly people in the urban areas and the well-off households use it.
- Formal sector credit need proper documents and collateral before lending.
- 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:
- Informal sector credit sources includes moneylenders, friends, relatives, traders etc.
- 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.
- They charge high rate of interest in comparison to that of formal sector. Thus the cost of borrowing is high.
- Due to high cost of borrowing, the borrowers have to repay more and they will have less saving, which will hinder individual economic development.