Compare and contrast the conditions for taking loans from formal and informal sources. Suggest an alternative source that you think is best for the rural people.

Banks and cooperatives are the main formal sources of credit. The financial institutions that lend according to guidelines of RBI can be termed as a formal source. A formal source is a source for raising the credit from the institutions which are under RBI or which are performed with a specific format. Therefore it can be more reliable than informal sources. The formal sources require the possession of the collateral. The rate of interest is also low compared to the other sources of credit.

Credit from these sources moneylenders, friends, relatives, traders, employers…etc. can be said as informal sources of credit. The credit from the informal source will not have any code of conduct. It does not require the possession of any collateral for taking loans. But they will charge a high exorbitant rate of interest. It will lead to a huge cost to the borrowers for repayment of the loans and lenders can easily exploit the borrowers.

Nowadays the banks are charging high charges and fines for maintaining the minimum balance in the bank account. It is a big deal for the poor person in India whether in rural or urban areas. Self Help Groups helps to overcome the problem of saving for the ordinary person. Self Help Group is a voluntary organization formed to enhance the microcredit for the members in it. The members of the organization save their money by fixing an amount to be deposited weekly, the amount will be such that it is affordable for everyone. That deposited money can be advanced as a loan to any of the member in the group who is actually in need of it. The loan will be advanced by the consent of all the group members. There will be transparency in the working of the organization because all the group members will be from the same neighbourhood.

If the Self Help Group is registered, they can be linked to the bank through the ‘SHGs linkage programme' under NABARD. With this, they can get loans with the low-interest rate from the commercial banks. They can accumulate capital by investing the money in small enterprises in which all the members can be employed. Through this everyone can be self-sustained and their standard of living rises. Thus, in this way people can get a loan in a hassle-free manner.