Q1. [1] medium thorough-understanding
[mcq] The Reserve Bank of India issues guidelines on interest rates and lending practices to commercial banks but does not exercise similar control over moneylenders or chit funds. Which of the following BEST explains why this difference in regulation exists?
(A) Moneylenders operate outside village boundaries and are therefore beyond the RBI's jurisdiction.
(B) Informal lenders are too numerous and dispersed, and their transactions are largely unrecorded, making systematic supervision impractical.
(C) Informal lenders charge lower interest rates than banks, so regulation is unnecessary.
(D) The RBI only regulates institutions that accept deposits from the public.
- A Informal lenders do not charge interest, so supervision is unnecessary.
- B Formal lenders are registered institutions accountable under law, whereas informal lenders operate outside any regulatory framework.
- C The RBI only supervises banks in urban areas, leaving rural lenders unregulated.
- D Informal lenders lend smaller amounts, making supervision impractical.
Generated by claude-sonnet-4-6 · 2026-06-26 13:25 · grounding rag
Model Answer
(B) Formal lenders are registered institutions accountable under law, whereas informal lenders operate outside any regulatory framework.
Explanation
The textbook states clearly: "The Reserve Bank of India supervises the functioning of formal sources of loans" and "There is no organisation which supervises the credit activities of lenders in the informal sector." The key distinction is that formal lenders (banks, cooperatives) are registered and legally accountable, making RBI supervision possible, while informal lenders operate outside any regulatory framework. Option B best reflects this from the given options.