1. Institutions: Formal sources of credit include banks and cooperative societies, whereas informal sources include moneylenders, traders, employers, relatives and friends. 2. Supervision: The Reserve Bank of India supervises the functioning of formal sources of credit - it sees that the banks maintain a minimum cash balance out of the deposits they receive, and that they give loans not just to profit-making businesses and traders but also to small cultivators, small-scale industries and small borrowers; banks have to submit periodic reports to the RBI showing how much they are lending, to whom and at what interest rate. In contrast, there is NO organisation which supervises the credit activities of lenders in the informal sector; they can lend at whatever interest rate they choose and there is no one to stop them from using unfair means to get their money back. 3. Rate of interest: The rate of interest charged by formal sources is low and fixed, while informal lenders charge a much higher interest rate; hence the cost of borrowing from informal sources is very high, and a large part of the borrower's earnings is used to repay the loan, so he is left with little income for himself. 4. Collateral and documentation: Formal lenders require proper documents and collateral (such as land, building, vehicle, livestock or bank deposits), which poor households often do not have, and therefore the poor have to depend on informal sources; informal lenders know the borrowers personally and often lend without collateral. 5. Effect on the borrower: Cheap formal credit increases production, employment and income and helps in the development of the country, whereas high-cost informal credit often leads the borrower into a DEBT-TRAP, in which he has to sell his land or assets to repay the loan. 6. Need of the hour: Therefore formal credit should be expanded so that it reaches everyone - especially poor households, small farmers and small-scale industries - and Self-Help Groups should be promoted to help the poor get loans without collateral.