Institutional and Non-institutional source of credit refer to different avenues through which individuals, businesses, or governments can access funds. Here are the key differences between Institutional and Non-institutional Source Of Credit:
Table of Contents
Institutional Source of Credit:
Institutional source of credit involve loans provided by commercial banks such as Regional Rural Banks (RRBs) and State Banks Of India (SBI) and by co-operatives. Institutional sources of credit follow a set of proper systematic legal procedures before sanctioning the loans. The Rate of interest charged by Institutional sources is far less than that of non-institutional sources.
Some key different points of institutional sources of credit are as follows:
1. Formalized Entities: Institutional sources involve formalized financial institutions like banks, credit unions, and other regulated financial organizations. These institutions operate under specific guidelines and regulations set by financial authorities.
2. Regulated: Institutional sources are subject to regulatory oversight to ensure compliance with financial laws and to safeguard the interests of depositors and borrowers.
3. Documentation: Borrowing from institutional sources often requires a thorough documentation process. This includes providing financial statements, collateral, and other necessary paperwork to assess creditworthiness.
4. Interest Rates: Interest rates from institutional sources are typically lower compared to non-institutional sources. This is because these rates are influenced by central bank policies and market conditions.
5. Security: Institutional sources often require collateral or some form of security to mitigate the risk of lending. This could be in the form of property, assets, or guarantees.
6. Large Scale: Institutional sources are well-suited for large-scale borrowing needs, such as business loans, mortgages, and government financing.
Non-institutional source of credit:
Non-institutional source of credit include those that provide loans such as traders, moneylenders, commission agents, landlords, and relatives. Non-institutional sources of credit, there is the absence of any particular set of systematic procedures and are more informal. Under the Non-institutional source people often fall prey to the exploitation of the person lending them.
Some key different points of Non-institutional sources of credit are as follows:
1. Informal Channels: Non-institutional sources involve informal channels like moneylenders, friends, family, and other unregulated lenders. These sources may not follow standardized procedures or operate within a legal framework.
2. Less Regulated: Non-institutional sources are generally less regulated compared to their institutional counterparts. This lack of regulation can lead to a higher risk of exploitation or unfair lending practices.
3. Documentation Varies: Non-institutional sources may not require extensive documentation, depending on the nature of the relationship or agreement. This can make the borrowing process more flexible but may also lack legal protection.
4. Higher Interest Rates: Interest rates from non-institutional sources tend to be higher. The lack of regulation and higher risk associated with these sources contribute to elevated interest charges.
5. Limited Scale: Non-institutional sources are more suitable for smaller-scale borrowing needs. They may be utilized for personal loans or small business financing when traditional avenues are not accessible.
6. Flexibility: Non-institutional sources can offer greater flexibility in terms of repayment schedules and conditions. However, this flexibility can also lead to uncertainties and risks for both parties.
Differences between Institutional and Non-institutional source of credit
The following are some of the differences between Institutional and Non-institutional source of credit:
Institutional credit:
- Institutional sources involve formal financial institutions such as banks and credit unions, operating under specific guidelines and regulations.
- Subject to regulatory oversight, these sources ensure compliance with financial laws and protect the interests of depositors and borrowers.
- Borrowing from institutional sources requires thorough documentation, including financial statements and collateral, to assess creditworthiness.
- Institutional sources offer lower interest rates influenced by central bank policies and market conditions.
- Collateral or security is often required by institutional sources to mitigate lending risks, such as property, assets, or guarantees.
- Well-suited for significant borrowing needs, institutional sources cater to business loans, mortgages, and government financing.
Non-institutional credit:
- Non-institutional sources involve informal channels like moneylenders, friends, family, and unregulated lenders, lacking standardized procedures.
- Generally less regulated than institutional counterparts, these sources pose a higher risk of exploitation or unfair lending practices.
- Non-institutional sources may not require extensive documentation, offering flexibility but lacking legal protection.
- Interest rates from non-institutional sources are higher due to the lack of regulation and increased risk.
- Suited for smaller-scale borrowing needs, non-institutional sources are utilized for personal loans or small business financing.
- Offering greater flexibility in repayment schedules, non-institutional sources also entail uncertainties and risks for both parties
Read More:
Classification Of Agricultural Credit: Meaning, Needs & Classification