Consider the following statements regarding the informal sector of credit: 1. Informal lenders are bound by government regulations on interest rates. 2. There is no one to stop informal lenders from using unfair means to get their money back. 3. The cost to the borrower of informal loans is generally much higher than formal loans. Which of the statements given above is/are correct?

The correct option is 2 and 3 only. Explanation The credit market in India is broadly classified into two sectors: the formal sector (banks and cooperatives) and the informal sector (moneylenders, traders, employers, relatives, and friends). The Reserve Bank of India (RBI) supervises the functioning of formal sources of loans, whereas the informal sector operates outside this regulatory framework. Statement-wise Analysis: - Statement 1 is Incorrect: Unlike the formal sector, where the RBI monitors the interest rates and lending practices, there is no organization that supervises the credit activities of lenders in the informal sector. Consequently, informal lenders are not bound by government regulations regarding interest rates and often charge arbitrarily high rates. - Statement 2 is Correct: Due to the absence of a regulatory body or legal oversight mechanism comparable to the RBI, there is no authority to prevent informal lenders from using unfair or coercive means to recover their money. - Statement 3 is Correct: The interest rates charged by informal lenders are significantly higher than those charged by banks or cooperatives. As a result, the cost to the borrower of informal loans is much higher, often leading to a debt trap where the interest obligation exceeds the borrower's income. Key Takeaway: The informal sector of credit is characterized by the absence of regulatory supervision (RBI), significantly higher interest rates compared to the formal sector, and the potential for exploitative recovery practices.

NCERT Class 10 Economics — Chapter 3: Money and Credit

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Consider the following statements regarding the informal sector of credit:

Informal lenders are bound by government regulations on interest rates.
There is no one to stop informal lenders from using unfair means to get their money back.
The cost to the borrower of informal loans is generally much higher than formal loans.

Which of the statements given above is/are correct?

Official previous-year question

Verified 1 Aug 2026.

Options

A1, 2 and 3
B2 and 3 only
C2 only
D1 and 2 only

Did you get this right?

Solution

The correct option is 2 and 3 only.

Explanation

The credit market in India is broadly classified into two sectors: the formal sector (banks and cooperatives) and the informal sector (moneylenders, traders, employers, relatives, and friends). The Reserve Bank of India (RBI) supervises the functioning of formal sources of loans, whereas the informal sector operates outside this regulatory framework.

Statement-wise Analysis:

Statement 1 is Incorrect: Unlike the formal sector, where the RBI monitors the interest rates and lending practices, there is no organization that supervises the credit activities of lenders in the informal sector. Consequently, informal lenders are not bound by government regulations regarding interest rates and often charge arbitrarily high rates.
Statement 2 is Correct: Due to the absence of a regulatory body or legal oversight mechanism comparable to the RBI, there is no authority to prevent informal lenders from using unfair or coercive means to recover their money.
Statement 3 is Correct: The interest rates charged by informal lenders are significantly higher than those charged by banks or cooperatives. As a result, the cost to the borrower of informal loans is much higher, often leading to a debt trap where the interest obligation exceeds the borrower's income.

Key Takeaway:
The informal sector of credit is characterized by the absence of regulatory supervision (RBI), significantly higher interest rates compared to the formal sector, and the potential for exploitative recovery practices.

Your note

More from Chapter 3: Money and Credit

Consider the following statements regarding the impact of high cost of borrowing: 1. A larger part of the earnings of the borrowers is used to repay the loan. 2. The repayment amount is always less than the income of the borrower. 3. It may discourage people from starting enterprises due to the debt burden. Which of the statements given above is/are correct?

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Consider the following statements regarding the 'Cheque' facility: 1. The payee instructs the bank to withdraw money from the payer's account. 2. It allows for the direct settlement of payments without the use of cash. 3. Cheques are a form of currency issued by the RBI. Which of the statements given above is/are correct?

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With reference to the credit needs in rural areas, consider the following statements: 1. The main demand for credit is for crop production. 2. There is no time gap between buying inputs and selling the crop. 3. Repayment of the loan is crucially dependent on the income from farming. Which of the statements given above is/are correct?

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Consider the following statements regarding the 'Krishak Cooperative': 1. It does not accept deposits from its members. 2. It uses deposits as collateral to obtain a large loan from the bank. 3. It provides loans for various purposes including house construction. Which of the statements given above is/are correct?

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Consider the following statements regarding the supervision of credit activities in India: 1. The World Bank supervises the functioning of formal sources of loans. 2. There is no organisation that supervises the credit activities of lenders in the informal sector. 3. Banks are not required to share any lending information with the RBI. Which of the statements given above is/are correct?

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Keep practising Chapter 3: Money and Credit

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The correct option is 2 and 3 only.

Explanation

Statement-wise Analysis:

Statement 1 is Incorrect: Unlike the formal sector, where the RBI monitors the interest rates and lending practices, there is no organization that supervises the credit activities of lenders in the informal sector. Consequently, informal lenders are not bound by government regulations regarding interest rates and often charge arbitrarily high rates.
Statement 2 is Correct: Due to the absence of a regulatory body or legal oversight mechanism comparable to the RBI, there is no authority to prevent informal lenders from using unfair or coercive means to recover their money.
Statement 3 is Correct: The interest rates charged by informal lenders are significantly higher than those charged by banks or cooperatives. As a result, the cost to the borrower of informal loans is much higher, often leading to a debt trap where the interest obligation exceeds the borrower's income.