(a)OR(b)

Differentiate between the formal and informal sources of credit.

Formal Sources of Credit Informal Sources of Credit

(i) No supervising authority.

(i) RBI supervises them.

(ii) High interest rate

(ii) Low interest rate.

(iii) Chances to get in debt trap

(iii) Repayment is easier. is higher.

(iv) High cost for borrowers.

(iv) Low cost for borrower.

(v) Terms of credit may not

(v) Terms of credit are be defined prior. predefined.

(vi) Collateral may not be

(vi) Collateral is required. required.

(vii) Friends, employer,

(vii) Banks and cooperative landlords, money lenders groups are major are major sources. sources.

(b) Explain the functioning of ‘Self-Help Groups’.

(i) The idea behind self-help group is to organise rural poor, especially women.

(ii) A typical Self-help group has $\displaystyle 15$-$\displaystyle 20$ members, usually belonging to one neighbourhood.

(iii) These members meet and save regularly.

(iv) They collect a pool of Rs.25 to Rs.100 or more depending on their ability to save.

(v) Most of the important decisions regarding the savings and loan activities are taken by the group members.

(vi) The members decide on - the purpose, amount, interest to be charged, repayment schedule etc.

(vii) Members can take small loans from the group itself to meet their needs – releasing mortgaged land, meeting working capital needs, arranging for housing materials, acquiring assets.

(viii) The group charges interest on loans which is less than that charged by money lenders.

(ix) After a year or two, if the group is regular in savings, it becomes eligible for availing loan from the bank.

(x) Banks are willing to lend to the SHGs, even though they have no collateral as such.

(xi) The group meets regularly to discuss and act on a variety of social issues.