Correct Option
The correct option is 2 and 3 only.
Explanation
The credit market in an economy is broadly classified into two sectors: the Formal Sector and the Informal Sector. The Formal Sector includes institutions like commercial banks and cooperatives, which operate under the regulatory framework of the central bank. The Informal Sector comprises moneylenders, traders, employers, relatives, and friends, operating outside direct regulatory oversight.
Statement-wise Analysis
- Statement 1 is Incorrect. The Informal Sector does not consist of banks and cooperatives. Banks and cooperatives constitute the Formal Sector of loans. The Informal Sector consists of moneylenders, traders, employers, relatives, and friends.
- Statement 2 is Correct. Unlike the Formal Sector, which is supervised by the Reserve Bank of India (RBI) (monitoring cash balance maintenance and lending distribution), there is no organisation that supervises the credit activities of lenders in the Informal Sector. They lend at whatever interest rate they choose, and there is no authority to stop them from using unfair means to get their money back.
- Statement 3 is Correct. A major characteristic of the Informal Sector is the absence of strict documentation and collateral requirements. Informal lenders, such as moneylenders, often know the borrowers personally and are therefore willing to give loans without collateral. In contrast, formal sector loans typically require collateral (an asset that the borrower owns) and proper documentation.
Key Takeaway
Informal Sector loans are characterized by the lack of a regulatory supervisor (like the RBI), higher and arbitrary interest rates, and the flexibility to lend without collateral based on personal relations, distinguishing them from the regulated Formal Sector (banks and cooperatives).