Bank and cooperatives are the two types of formal sector of credit
Formal Sector: The formal Sector comprises of banks and cooperative societies.While the formal sector is bound by the rules and regulations of the RBI and charge the prevalent rate of interest as per RBI guidelines; the informal lenders are not bound by such rules. The informal lenders usually charge a very high rate of interest. A higher cost of borrowing is often detrimental to the borrower. It usually results in a debt trap for the borrower. The borrower is seldom able to escape the never ending cycle of loan repayment.