Informal Financial System From the above diagram, it can be easily understood that the Indian Financial System can be categorized into formal and informal financial system. The Informal financial system consists of moneylenders; Associations, funds, clubs, committees etc. These people have a system and they have their own rules on how they should function in their day to day activities.
Moreover, informal financial system responds quickly to short term financing opportunities and allowed low income people access to service not available to them through the formal channel. Another advantage is that in informal financial system, loans were given quickly to the lenders. Also, informal financial markets are not subject to interest rate regulation. They do not incur legal expenses and their cost of lending and deposit taking tends to be lower than that of formal financial institutions. However, the formal financial system is always preferable because it is systematic and transparent and offers numerous benefits.
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