Social Science — CBSE Class 10 board question

Formal vs Informal Sources of Credit

| Basis | Formal Sources | Informal Sources |
|---|---|---|
| Examples | Banks, cooperative societies | Moneylenders, traders, employers, relatives, friends |
| Supervision | Regulated by RBI, which monitors interest rates, lending practices, and cash balance | No regulatory body; lenders charge any interest rate they wish |
| Interest Rate | Low (e.g., 8.5% per annum for Arun's bank loan) | Very high (e.g., 36–60% per annum charged by moneylenders/traders in Sonpur) |
| Collateral | Usually required; poor lack collateral and are often excluded | Not always required; moneylenders know borrowers personally |
| Borrowers served | Mostly richer households (83% of rich urban households use formal credit) | Mostly poor households (54% of poor urban households depend on informal credit) |
| Risk to borrower | Lower; terms are transparent | Higher; unfair means may be used for recovery, leading to debt traps |

It is essential to expand formal credit so that the poor depend less on costly informal sources.

Source: Chapter 3 — Money and Credit, Formal Sector Credit in India; Variety of Credit Arrangements

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• Examiners expect a comparison format — a table earns full marks quickly and is preferred for "differentiate" questions.
• Mention RBI supervision as the key distinguishing feature for formal sources.
• Use specific examples from the chapter (Arun's bank loan rate vs Shyamal's trader loan) to show application — examiners reward this.
• The concluding line on expanding formal credit links to the chapter's core message and shows conceptual understanding.
• 5 marks → aim for 5 clear points of difference; a table with 5–6 rows covers this perfectly.