What are the differences between formal and informal sources of credit?
Formal sources of credit include banks and cooperatives, whereas informal sources include moneylenders, traders, employers, relatives and friends.
There is a major difference in the cost of borrowing. Informal lenders charge a very high interest rate and do little to increase the borrowers' income. In contrast, formal sources provide cheap credit at reasonable rates.
Finally, the beneficiaries differ significantly. Richer households receive most of the credit from formal sources. However, poor households have to depend on informal sources, paying a large amount for borrowing.
Explanation
The answer is derived directly from the provided context. The first paragraph distinguishes the providers of credit based on the text's grouping of 'formal sector loans' (banks and cooperatives) and 'informal lenders' (moneylenders, traders, etc.). The second paragraph highlights the difference in interest rates, citing the text's mention that informal loans carry 'very high interest rates' while formal loans are 'cheap'. The third paragraph addresses the disparity in access, referencing the text's observation that richer households avail formal credit while the poor depend on informal sources.