Importance of formal sources of credit in economic development are as follows :
(i) It is monitored by the Reserve Bank of India or regulated by the Government of India and thus helps in bringing order to the system of lending and borrowing in the country.
(ii) Provides fixed interest rate to all sections of society.
(iii) Limits the scope of using unfair means to repay the payment.
(iv) Less interest rate and accessible to all, rich or poor.
OR
Following are the bad effects of informal sources of credit :
(i) They are not subordinate to any government organisation like RBI, thus there is no official backing or monitoring agency.
(ii) Absence of a fixed interest rate increases the scope of exploitation.
(iii) Increases the probability of scope of using unfair means to get back their payment.
(iv) Higher interest rates, with no official records, often lead to debt traps.