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Sectors of Credit in India

People obtain loans from various sources. The various types of loans can be conveniently grouped as:-
  • Formal Sector Loans
  • Informal Sector Loans

The formal sector loans

(i) Loans from banks

(ii) Loans from cooperatives.

The informal sector

(i) Loans from money lenders

(ii) Loans from traders

Here is a glance at the distribution of credit source in rural India.

Sources of Credit for rural households in India 2003


Cooperative societies

Commercial banks

Relatives and friends




30 %

27 %

25 %

7 %

3 %

1 %

7 %


Formal Credit Sector

The Reserve Bank of India supervises the functioning of formal sources of loans. The banks maintain a minimum cash balance out of the deposits they receive. The rest of the deposit money is given out as loans. The RBI monitors that the banks actually maintain the cash balance and sees that the banks give loans not just to profit-making businesses and traders but also to small cultivators, small scale industries, to small borrowers etc. Periodically, banks have to submit information to the RBI on how much they are lending, to whom and at what interest rate.

Informal Credit Sector

There is no organisation which supervises the credit activities of lenders in the informal sector. They can lend at whatever interest rate they choose. There is no one to stop them from using unfair means to get their money back.

Compared to the formal lenders, most of the informal lenders charge a much higher interest on loans. Thus, the high interest rate of borrowing can mean that the amount to be repaid is greater than the income of the borrower. People who wish to start an enterprise by borrowing may not do so because of the high cost of borrowing.

Banks and cooperative societies need to lend more to the underprivileged so that they could grow crops, do business, set up small-scale industries etc.

Cheap and affordable credit is crucial for the for the country's development

Comparison between Formal and Informal Credits

Let us look at the tabular column below, to see the percentage of formal and informal credit distribution in urban households

Distribution of Formal & Informal credits


Poor households

Households with a few assets

Well-off households

Rich households


15 %

47 %

72 %

90 %


85 %

53 %

28 %

10 %

Here are the deductions from the above findings.

I. The formal sector still meets only about half of the total credit needs of the rural people. The remaining credit needs are met from informal sources.

II. It is the richer households who receive formal credit whereas the poor have to depend on the informal sources.


It is important that the formal credit is distributed more equally so that the poor can benefit from the cheaper loans. Thus, it is necessary that banks and cooperatives increase their lending particularly in the rural areas, so that the dependence on informal sources of credit reduces.

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