Why are formal sources more beneficial than informal sources of credit in India? Explain by giving any three arguments.

(i) Formal sources offer loan at comparatively low rate of interest than the informal sources of credit.

(ii) They are supervised by the Reserve Bank of India whereas there is no supervisory body to keep a check on the informal sources of credit.

(iii) Collateral is required to borrow money from the formal sources of credit whereas there is no need of collateral in the informal sources of credit.

(iv) In urban areas, the formal source is the main source of credit while in rural areas people usually borrow from the informal sources of credit.

(v) The process of lending is long and complicated in the formal sources whereas it is easy to borrow from the informal source of credit.

(vi) The formal sources of credit do not use unfair means to get their money back while the lender in the informal sources of credit might use unfair means to recover the loan.

(vii) The examples of formal sources of credit are banks, cooperatives, etc. while the informal sources can be moneylenders, agricultural traders, friends, family, relatives, etc.