Money and Credit

NCERT Questions

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

It is acceptable that in situations with high risks, credit might create further problems for the borrower. For example, a small farmer takes a loan from the moneylender for crop production, hoping that his harvest would help repay the loan.

But due to unavoidable factors there is a crop failure and the farmer becomes unable to repay the moneylender and the debt grows over the year into a large amount. Next year, he takes a fresh loan for cultivation. It is a normal crop this year.

But the earnings are not enough to cover the old loan. So he is caught in debt and has to sell a part of the land to pay off the debt.

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

Money solves the problem of double coincidence of wants by acting as an intermediate in the exchange process.

Example: A shoe manufacturer wants to sell shoes in the market and buy wheat For this, he will first exchange shoes that he has produced for money and then exchange the money for wheat. Imagine how difficult it would be if money does not act as a medium of exchange.

In such a situation, the shoe manufacturer would have to look for a farmer who not only wants to sell wheat but also wants to buy the shoes in exchange, i.e., both parties selling shoes and wheat have to agree to sell and buy each other commodities.

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

Banks keep only a small proportion of deposits as cash with themselves (15% of deposits) and the rest of the deposits are extended as loans for various economic activities at a higher interest rate than what the banks offer on deposits.

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

Matter written on the top of a 10 rupee note is:

‘Reserve Bank of India’ and ‘Guaranteed by the Central Government’

It means that the Reserve Bank of India has been authorised by the Central Government to issue 10 rupee note which can be used as a medium of exchange. None can refuse to accept it in exchange for goods and services and in discharge of debts because its non-acceptance is an offence.

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

Formal sources of credit which includes loans from banks and cooperatives need to be expanded in India to save the poor households from the exploitation of the informal sources of credit. In the informal sector there is no organisation to supervise the credit activities of lenders.

So they charge a higher interest on loans which means a larger part of the earnings of the borrowers is used to repay the loan. Besides it a borrower may fall into debt trap.

On the other hand, the formal resources works under the supervision of the Reserve Bank of India. The RBI sees that the banks give loans not just to profit-making business and traders but also to small cultivators, small scale industries, to small borrowers, etc.

Formal sector lends at a reasonable rate of interest which is very cheap and affordable as compared to informal credit. Thus, all this demands expanding formal sources of credit in India.

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


What are Self Help Groups? Describe, in brief, their functioning.


(a) Self-Help Groups is an organised group of rural poor, mainly women, having 15-20 members of a neighbourhood.

(b) Members of SHGs meet and save regularly according to their ability, to collect their savings.

(c) Saving per member can vary from Rs 25 to Rs 100 or more, depending on the ability of the people and the strength of the group.

(d) Members can take small loans from the group to meet their needs. Small rates of interests are charged.

(e) After a year or two, if the group is regular in savings, it becomes eligible for availing loan from the bank for self-employment opportunities for the members.

(f) Self-Help Groups help borrowers to overcome the problem of lack of collateral to take formal loans.

(g) SHGs are the building blocks of organisation of the rural and poor people.

(h) The rural and poor people can get timely loans for a variety of purposes and at a reasonable interest rate.

(i) They help the women to become financially self-reliant. Regular meetings of the groups provide platform to discuss and act on a variety of social issues such as health, nutrition, domestic violence, etc.

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

Before lending a loan any bank ensures about the financial capacity of the borrower through which he would repay the loan. Bank demands proper documents and collateral against loans.

People, who do not satisfy bank with their loan paying capacity and do not have anything to be considered as collateral, are not able to take a loan. Thus, the banks might not be willing to lend to certain borrowers who do not fulfil certain conditions of the loan.

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

The Reserve Bank of India supervises the functioning of banks in the following ways:

(a) It monitors the cash balance of every bank functioning in the country.

(b) It supervises the functioning of the formal sources of loans.

(c) It sees that loans are evenly given out to both rich and small businessmen, cultivators, etc.

(d) Other banks functioning in the country, periodically submit reports to the RBI giving details about their interest rates, to whom loans have been given out, etc.

(e) The RBI actually helps and advises to the government on financial matters.

(f) It determines cash reserve ratio and statutory liquidity ratio which commercial banks ought to maintain.

It is necessary for the RBI to supervise the working of banks so that all the banks could follow a common policy according to national requirements.

Question 9.
Analyse the role of credit for development.

Credit plays a vital and positive role in economic life. In rural areas, the main demand for credit is for crop production. Credit enables farmers to purchase modern inputs like fertilisers, seeds, pesticides, machines, etc. All this results in good crop production.

Credit helps traders and businessmen to expand their business and increase earnings.

Question 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.

Manav will go for formal sources of credit, i.e., bank if he has all the necessary documents and collateral against loan. Here he will get loan at a reasonable rate of interest. If he cannot fulfil certain conditions of loan then he will depend on the informal sources of credit like moneylenders, traders who lend at whatever interest rate they choose and use unfair means to get their money back.

Question 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?
(b) What are the other sources from which the small farmers can borrow?
(c) Explain with an example how the terms of credit can be unfavourable for the small farmer.
(d) Suggest some ways by which small farmers can get cheap credit.


(a) As the small farmers cannot give any proof of their income and are unable to submit anything to be considered as collateral, so the banks might be unwilling to lend them.

(b) The other sources from which the small farmers can borrow are moneylenders, traders, employers, relatives, friends, etc.

(c) Terms of credit can be unfavourable for small farmers if they borrow from informal sources. For example, if a farmer borrows from a moneylender and, in case, he is unable to repay the loan then he will have to suffer illtreatment from the moneylender.

(d) Small farmers can get cheap credit from their own cooperatives and SHGs.

Question 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.


(a) rural
(b) Higher
(c) The RBI
(d) deposits
(e) Collateral

Question 13.
Choose the most appropriate answer:

(a) In a SHG most of the decisions regarding savings and loan activities are taken by

(i) bank
(ii) members
(iii) non-government organisation

(b) Formal source of credit does not include

(i) banks
(ii) cooperatives
(iii) employers

(a) (i)
(b) (iii)

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