ECO (X)- LESSON-3 MONEY AND CREDIT QUESTION ANSWERS

 

ECO (X)- LESSON-3

MONEY AND CREDIT

QUESTION ANSWERS

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NCERT EXERCISE

1. In situations with high risks, credit might create further problems for the borrower. Explain.

Answer: In situations with high risks, credit might create further problems for the borrower. Credit involves a certain amount of loan that is taken by a borrower from a lender at a high-interest rate. In case there is a failure, and the borrower faces loss, then he further falls in the trap of credit. This is known as a debt trap. The borrower has to repay the credit along with interest applied by the lender, and he further falls into the trap of credit, increasing the problems for the borrower. The borrower also has to sell a part of his or her land to repay the loan.

2. How does money solve the problem of double coincidence of wants? Explain with an example of your own.

Answer: ‘Double coincidence of wants’ is when whatever a person desires to sell is exactly what the other wishes to buy. In a barter system where goods are directly exchanged without the use of money, double coincidence of wants is an essential feature. Money solved the problem of double coincidence of wants because after the introduction of money, people could use money as an intermediate to buy or sell things and no specific buyer or seller was required for interchanging of products. For example, a trader wishes to sell 10 sacks full of rice and expects to get it in exchange for five sacks of cereal. To find a suitable buyer to sell the sacks of rice in exchange for cereals would be very tough. However, the money will solve this problem, and the trader can sell the sacks of rice to someone who needs it and in return, buy cereals from the money he gets from the buyer of rice.

3. How do banks mediate between those who have surplus money and those who need money?

Answer: Banks mediate between those who have surplus funds (the depositors) and those who are in need of funds (the borrowers) by lending money to people who are in need. People can open accounts in banks and banks make use of that money to fulfil the loan requirements of the people. A higher interest rate is charged for the borrower and that profit is given to the depositor as interest for offering deposits.

4. Look at a 10 rupee note. What is written on top? Can you explain this statement?

Answer: “Reserve Bank of India” and “Guaranteed by the Central Government” is written on the top of a 10 rupee note. Currency in India is issued by the central bank of the country, in the case of India, the Reserve Bank of India is the central bank of the country. This currency is issued on behalf of the central government, and these two are the only authorities which are responsible for issuing notes and currency in India.

5. Why do we need to expand formal sources of credit in India?

Answer: Formal sources of credit are the Government authorised organisations that are eligible to lend money to people. It is important to expand formal sources of credit in India because

1. The informal sources are not registered with government agency.

2. They lend money to people at very high-interest rates which is unfair and must not be practised.

3. If formal sources of credit are increased, people will be able to borrow money at lesser interest .

4. If formal sources of credit are increased, people will be able to take loans and use them for the development of the country.

6. What is the basic idea behind the SHGs for the poor? Explain in your own words.

Answer: The Self Help Groups (SHGs) have been set in India with an aim to help the rural poor, especially women. A typical Self Help Group comprises 15-20 people from the same neighbourhood who save some money from their daily wages and collect them together. People can borrow money from these groups during an emergency or when they are in need. They charge a minimum rate of interest from the borrowers. Once the SHG has managed to save a defined amount of money, they are also eligible to take loans from banks. The main purpose of introducing these Self Help Groups was to increase small scale employment opportunities for the rural people so that they could start a small business to earn a livelihood.

7. What are the reasons why the banks might not be willing to lend to certain borrowers?

Answer: The reasons why banks might not be willing to lend money to certain borrowers are given below:

1. Some people fail to provide the required set of documents to get a loan

2. Irregular wages and no fixed job is also one reason because it increases the chances of non-repayment of loans

3. Certain borrowers are added to the list of NPAs

4. There is high risk in approving loans to entrepreneurs

8. In what ways does the Reserve Bank of India supervise the functioning of banks? Why is this necessary?

Answer: The Reserve Bank of India is the central bank of India, and all the other public sector banks work under the supervision of the Reserve Bank of India. It manages the functioning of the banks in the following ways:

1. It monitors the bank in maintaining the cash balance.

2. Loans are not just given to profit-making organisations but also to small cultivators and small scale industries.

3. RBI maintains a periodic report of other banks regarding the amount loaned to people.

4. It also keeps a regular check on the interest rates set for loans in public sector banks.

9. Analyse the role of credit for development.

Answer: Credit is one of the most major aspects of the development of a country. Affordable credit plays a very important role in the country’s development. People need loans for different reasons and to meet this requirement credit is very important. In India, a major part of the population is engaged in agricultural activities; credit plays a very crucial role in agricultural activities. People can borrow money and use modern farming methods to grow crops which are more reliable than the traditional methods of growing crops. Apart from this, there are small scale industries, business and various other sectors where credit can help people and ultimately result in the development of the country.

10. Manav needs a loan to set up a small business. On what basis will Manav decide whether to borrow from the bank or the moneylender? Discuss.

Answer: Manav wants to set up a small business. He needs to keep the below-mentioned things in mind while deciding whether to borrow money from a bank or money lender:

1. He needs to compare the interest rate charged by both the bank and the moneylender. Whoever charges less should be his option.

2. He needs to analyse whether he has all the eligible documents required by the banks to get his loan approved.

3. How he wishes to repay the lender.

11. In India, about 80 per cent of farmers are small farmers, who need credit for cultivation.

a. Why might banks be unwilling to lend to small farmers?

Answer: Banks might be unwilling to lend money to small farmers because there are high risks. If the harvest gets ruined, there is a possibility that they might not be able to receive the instalments on time. Also, proper documentation is required for getting a loan from the bank, which might not be available with the small scale farmers.

b. What are the other sources from which the small farmers can borrow?

Answer: Small farmers can move to informal sources of credit if they re not borrowing money from a bank. These informal sources of credit include moneylenders, agricultural traders, etc.

c. Explain with an example of how the terms of credit can be unfavourable for the small farmer.

Answer: When a small scale farmer borrows money from a bank, he has to repay the amount at a fixed rate of interest. For example, if a farmer borrows money from the bank and during the harvest season his crops are ruined, then he shall not be able to repay the amount loaned him by the bank and will further fall into the debt trap.

d. Suggest some ways by which small farmers can get cheap credit.

Answer: Small farmers can get cheap credit by the formal sources of credit like banks.

12. Fill in the blanks:

a. Majority of the credit needs of the _________________households are met from informal sources.

b. ___________________costs of borrowing increase the debt-burden.

c. __________________ issues currency notes on behalf of the Central Government.

d. Banks charge a higher interest rate on loans than what they offer on __________.

e. _______________ is an asset that the borrower owns and uses as a guarantee until the loan is repaid to the lender.

Answer a: poor

Answer b: high

Answer c: Reserve Bank of India

Answer d: deposits

Answer e: collateral

13. Choose the most appropriate answer.

 

A. In an SHG, most of the decisions regarding savings and loan activities are taken by

a. Bank.

b. Members.

c. Non-government organisation.

Answer: b. Members

 

B. Formal sources of credit do not include

a. Banks.

b. Cooperatives.

c. Employers.

Answer: c. Employers

 

OTHER IMPORTANT QUESTIONS

 1. The currency notes on behalf of the Central Government are issued by whom?
Answer: Reserve Bank of India.

 2. Why do banks ask for collateral while giving credit to a borrower?
Answer: Collateral is an asset that the borrower owns (land, building, vehicle, livestock, land documents, deposits with banks, etc.) which stands as a security against the money borrowed. In case the borrower fails to repay the loan, the lender has the right to sell the asset or collateral.

 3. What do banks do with the deposits they accept from customers?
Answer: Banks use a major portion of deposits to extend loans to people.

 4. What comprises ‘terms of credit’?
Answer: Interest rate, collateral and documentation requirement and mode of repayment together comprise terms of credit.

 5. What is the main informal source of credit for rural households in India?
Answer: Money lenders are the main source of informal credit for rural households.

 6. Which body supervises the functioning of formal sources of loans?
Answer: Reserve Bank of India.

 7. ‘Modern currency is without any use of its own’; then why is it accepted as a medium of exchange?
Answer: Modern currency is accepted as a medium of exchange because it is certified for a particular denomination (?10, ?100, etc.) of the country by authorities set up by the Central Government. It is issued by the Reserve Bank of India and it can be used for buying any commodity which is on sale. It is authorized by the government of the country.

 8. What is the meaning of ‘barter system’?
Answer: Barter system refers to the system of exchange of goods and services. It is the system by which one commodity is exchanged for another without the use of money. Before money was introduced, people practised barter system.
Example: A farmer could buy a dhoti from a weaver or a pair of shoes from a cobbler in exchange of grains he produced.

 9. What is the meaning of ‘investment’?
Answer: Investment is buying of an asset in the form of a factory, a machine, land and building, etc. (physical assets) or shares (monetary assets) for the purpose of making or sharing profits of the enterprises concerned.
Common investments are—buying land, factories, machines for faster production, buying small local companies to expand production, cheap labour, skilled engineers, IT personnel, etc.

 10. What is meant by double coincidence of wants?
Answer: Double coincidence of wants means when both parties have agreed to sell and buy each other’s commodities.

 11. How does money act as a medium of exchange?
Answer: Money acts as a medium of exchange as it acts as an intermediate in the exchange process and transactions. A person holding money can easily exchange it for any commodity or services that he or she might want.

 12. How do the deposits with banks become their source of income?
Answer: Banks charge a higher interest rate on loans they extend than what they offer on deposits. The difference of interest is the main source of income of banks.

 13. Why one cannot refuse a payment made in rupees in India?
Answer: One cannot refuse a payment made in rupees in India because it is accepted as a medium of exchange. The currency is authorized by the government of the country.

 14. Compare formal sector loans with informal sector of loans regarding interest only.
Answer: Most of the informal lenders charge a much higher interest on loans than the formal sector loAnswer:

 15. Why is the supervision of the functioning of formal sources of loans necessary?
Answer: Supervision of the functioning of formal sources of loans is necessary because banks have to submit information to the RBI on how much they are lending, to whom they are lending and at what interest rate etc.

 16. Prove with an argument that there is a great need to expand formal sources of credit in rural India.
Answer: There is great need to expand formal sources of credit in rural India because:

1. There is no organisation that supervises the credit activities of lenders in the informal sector. They lend at whatever interest rate they choose.

2. No one can stop rural money-lenders from using unfair means to get their money back.

 17. Why are most of the poor households deprived from the formal sector of loans?
Answer: Most of the poor households are deprived from the formal sector loans because of lack of proper documents and absence of collateral.

 18. What do you understand by demand deposits?
Answer: The money deposited in the bank which can be withdrawn on demand, are known as demand deposits.

Features:

1. A demand deposit has the essential characteristic of money. It can be used as a medium of exchange.

2. The facility of cheques against demand deposits makes it possible to make payments, without using cash.

3. Since demand deposits are accepted widely as a means of payment along with currency, they constitute money in the modem economy.

 19. Which country has successfully organized SHGs? Who had initiated the programme?
Answer:
Bangladesh has successfully organized SHGs. Grameen Bank of Bangladesh is the biggest success story in reaching the poor to meet their credit needs at reasonable rates. Grameen Bank has now over 6 million borrowers in 40,000 villages across Bangladesh. Most of the borrowers are women and belong to the poorest section of society. This idea is the brain child of Prof. Mohammad Yunus, recipient of 2006 Nobel Prize for Peace.

 20. Highlight the inherent problem in double coincidence of wants.
Answer: Double coincidence of wants means that when someone wants to exchange his goods with another person, the latter must also be willing to exchange his goods with the first person. It can only work when both the persons are ready to exchange each other’s goods.

 21. How does the use of money make it easier to exchange things? Give an example. Answer: The use of money solves the problem of double coincidence of wants. Money acts as a medium of exchange and serves as a unit of value.

SHORT ANSWER S (SA) 3 MARKS

 22. What is money? Why is modern money currency accepted as a medium of exchange?
Answer: Money is a medium of exchange in transactions. A person holding money can easily exchange it for any commodity or service that he or she might want.
Modem money currency is accepted as a medium of exchange because

1. It is certified for a particular denomination (For example, ₹ 10, ₹ 20, ₹ 100, ₹ 1,000).

2. It is issued by the Central Bank of the country.

3. It is authorized by the government of the country.

 23. What are the modern forms of money? Why is the ‘rupee’ widely accepted as a medium of exchange? Explain two reasons.
Or
Why is modern currency accepted as a medium of exchange without any use of its own? Give reasons?
Answer: Modem forms of money currency in India include paper notes and coins which are known as Rupees and Paise.

1. It is accepted as a medium of exchange because the currency is authorized by the Government of India.

2. In India, the Reserve bank of India issues currency notes on behalf of the Central Government of India.

3. The law legalizes the use of rupee as a medium of payment that cannot be refused in settling transaction in India.

4. No Individual in India can legally refuse a payment made in rupees.
Therefore, the rupee is widely accepted as a medium of exchange.

 24. What is collateral? Why do lenders ask for collateral while lending? Explain.
Answer: Collateral is an asset that the borrower owns (land, building, vehicle, livestock, land documents, deposits with banks etc.) which stands as a security against the money borrowed. In case the borrower fails to repay the loan, the lender has the right to sell the asset or collateral to recover the loan money. Most lenders ask for collateral while lending as a security against their own funds.

 25. “Cheap and affordable credit is essential for poor households both in rural and urban areas.” In the light of the above statement explain the social and economic values attached to it.
Or
“Cheap and affordable credit is crucial for the country’s development.” Assess the statement.
Or
‘Credit has its own unique role for development’. Justify the statement with arguments.
Answer: Credit means loan. It refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future repayment.

Cheap and affordable credit is crucial for the country’s growth and economic development. Credit is in great demand for various kinds of economic activities—big or small investments, to set up business, buying cars, houses, etc.

In rural areas credit helps in the development of agriculture by providing funds to farmers to buy seeds, fertilizers, expensive pesticides.

Manufacturers need credit for buying raw material or to meet ongoing expenditure of production. Credit helps in the purchase of plant, machinery, equipment, etc.

Some people may need to borrow for illness, marriages etc.
Thus, cheap and affordable credit is crucial for the country’s growth and economic development.