With reference to the 'Formal Sector' of credit, consider the following statements: 1. It includes moneylenders and landlords. 2. It charges lower interest rates compared to the informal sector. 3. It is less accessible to poor households in urban areas compared to the rich. Which of the statements given above is/are correct?

The correct option is 2 and 3 only. Explanation Credit sources in an economy are broadly classified into two categories: the Formal Sector and the Informal Sector. The distinction is primarily based on the regulatory framework, interest rates, and the nature of the lender. Statement-wise Analysis - Statement 1 is Incorrect. The Formal Sector of credit comprises institutions such as commercial banks, cooperative societies, and Regional Rural Banks (RRBs) that operate under the supervision of the Reserve Bank of India (RBI). Moneylenders, landlords, traders, friends, and relatives constitute the Informal Sector, which is not regulated by any central authority. - Statement 2 is Correct. The Formal Sector charges significantly lower interest rates compared to the Informal Sector. Informal lenders often charge usurious and arbitrary interest rates because they are not bound by regulatory caps or standardized banking practices, leading to debt traps for borrowers. - Statement 3 is Correct. Formal credit is less accessible to poor households, particularly in urban areas, compared to rich households. This is largely due to the requirement of collateral and proper documentation (KYC, income proof), which poor households often lack. Consequently, wealthier households receive a major share of formal credit, while poorer households are forced to rely on the informal sector. Key Takeaway: The Formal Sector (banks, cooperatives) is characterized by RBI supervision, lower interest rates, and collateral requirements, whereas the Informal Sector (moneylenders) operates without supervision, charges high interest, and is often the primary source of credit for the poor due to lack of collateral.

NCERT Class 10 Economics — Chapter 3: Money and Credit

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With reference to the 'Formal Sector' of credit, consider the following statements:

It includes moneylenders and landlords.
It charges lower interest rates compared to the informal sector.
It is less accessible to poor households in urban areas compared to the rich.

Which of the statements given above is/are correct?

Official previous-year question

Verified 1 Aug 2026.

Options

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

Did you get this right?

Solution

The correct option is 2 and 3 only.

Explanation

Credit sources in an economy are broadly classified into two categories: the Formal Sector and the Informal Sector. The distinction is primarily based on the regulatory framework, interest rates, and the nature of the lender.

Statement-wise Analysis

Statement 1 is Incorrect. The Formal Sector of credit comprises institutions such as commercial banks, cooperative societies, and Regional Rural Banks (RRBs) that operate under the supervision of the Reserve Bank of India (RBI). Moneylenders, landlords, traders, friends, and relatives constitute the Informal Sector, which is not regulated by any central authority.
Statement 2 is Correct. The Formal Sector charges significantly lower interest rates compared to the Informal Sector. Informal lenders often charge usurious and arbitrary interest rates because they are not bound by regulatory caps or standardized banking practices, leading to debt traps for borrowers.
Statement 3 is Correct. Formal credit is less accessible to poor households, particularly in urban areas, compared to rich households. This is largely due to the requirement of collateral and proper documentation (KYC, income proof), which poor households often lack. Consequently, wealthier households receive a major share of formal credit, while poorer households are forced to rely on the informal sector.

Key Takeaway: The Formal Sector (banks, cooperatives) is characterized by RBI supervision, lower interest rates, and collateral requirements, whereas the Informal Sector (moneylenders) operates without supervision, charges high interest, and is often the primary source of credit for the poor due to lack of collateral.

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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The correct option is 2 and 3 only.

Explanation

Statement-wise Analysis

Statement 1 is Incorrect. The Formal Sector of credit comprises institutions such as commercial banks, cooperative societies, and Regional Rural Banks (RRBs) that operate under the supervision of the Reserve Bank of India (RBI). Moneylenders, landlords, traders, friends, and relatives constitute the Informal Sector, which is not regulated by any central authority.
Statement 2 is Correct. The Formal Sector charges significantly lower interest rates compared to the Informal Sector. Informal lenders often charge usurious and arbitrary interest rates because they are not bound by regulatory caps or standardized banking practices, leading to debt traps for borrowers.
Statement 3 is Correct. Formal credit is less accessible to poor households, particularly in urban areas, compared to rich households. This is largely due to the requirement of collateral and proper documentation (KYC, income proof), which poor households often lack. Consequently, wealthier households receive a major share of formal credit, while poorer households are forced to rely on the informal sector.