Page 75 - Understanding Economics for Class 10

The people are divided into four groups, from poor to rich.
 In the urban areas, 85% of the loans
taken by poor households are from Of all the loans taken by urban households,
informal sources whereas only 10% of what percentage was formal and what percentage
Goyal Brothers Prakashan
was informal?
the loans are taken by rich households
from informal sources. It means rich 10%
households mainly takes loan from 15%
formal sources.
 In rural areas, a similar pattern is 90% 85%
found in which rich households enjoy
the advantage of accessing inexpensive Rich Poor
credit from formal lenders whereas the Households Households
poor households bears the burden of high
borrowing costs. 28%
 Hence, we can say that, firstly, only 47% 53%
about half of the total credit needs of 72%
the rural people are met by formal sector
whereas remaining credit needs are met Well-off Households
from informal sources. households with few assets
 A very high interest rate is charged on Percent of loans from the INFORMAL sector
most of the loans from informal sources Percent of loans from the FORMAL sector

and therefore contributes a little in (Courtesy: NCERT)
increasing the income of the borrowers.
 Therefore, it becomes imperative for banks and cooperatives to expand their lending
activities, especially in rural areas, in order to reduce reliance on informal credit sources.
 Secondly, while there is a need for formal sector loans to expand, it is also necessary
that everyone gets these loans.
 At present, poor have to depend on the informal sources whereas formal credit is received
by the richer households.
 It is important that the formal credit is distributed more equally so that the poor can benefit
from the cheaper loans.

LET’S Work ThESE ouT (Page No. 50)
1. What are the differences between formal and informal sources of credit?

Ans. S.No. Formal sources of Credit Informal sources of credit
1. Under this sector, loans can be taken Sources of credit includes money
from banks and cooperatives. lenders, traders, employers, relatives
and friends etc.
2. The functioning of formal sources of In the informal sector, there is no
loans is supervised by the Reserve Bank organisation which supervises the credit
of India. activities of lenders.
3. Proper documentation and collateral are It does not involve any paper work and
required before granting loan. It is used collateral.
as a guarantee to the lender until loan
is paid back.

E-66 Economics Class X