Question

Which of the following differences between formal and informal sources of credit are correct?

• A. The RBI regulates the activities of formal sources of credit, but there is no agency to regulate the activities of informal sources of credit.
• B. The RBI regulates the activities of both formal sources of credit and informal sources of credit.
• C. The primary motive of informal sources of credit is providing service, but the primary motive of formal sources of credit is earning profit.
• D. The primary motive of formal sources of credit is providing service, but the primary motive of informal sources of credit is earning profit.

Answer 1

Answer: (A), (D)

The primary motive of formal sources of credit is providing service, but the primary motive of informal sources of credit is earning profit.

Formal sources of credit include banks. They give credit after the terms of credit like collateral, interest, etc. are defined. Informal sources of credit include moneylenders, friends, and family. They do not have defined terms of credit and charge high interest rates. The RBI regulates the functioning of the formal sources of credit and these sources are meant to provide service to the people in need.