1. Money and credit are essential features of modern economies that facilitate transactions and economic activity. Banks accept deposits from the public and use most of the funds to extend loans to meet demand for credit.
2. A barter system relies on double coincidence of wants where both parties have goods the other wants, while modern currency functions as a widely accepted medium of exchange backed by legal status.
3. Self-help groups organize the rural and urban poor, particularly women, into small collectives that pool savings, provide loans to members, and address various social issues through regular meetings. They help overcome lack of collateral and provide affordable credit.
1. MONEY AND CREDIT
NOTES
Q.1 Why are transactions made in money ? Explain with examples .
Ans. 1. A person with money can easily exchange it for any commodity or service
that he or she might want .
2. Everyoneprefers to receive payments in money and then exchange the money
for things that they want .
3. For example, a shoe manufacturer wants to sell shoes and buy wheat. He will
sell shoes for money and then exchange the money for wheat .
Q.2 Why is double coincidence of wants an essential feature of a Barter system?
Ans. 1. Double coincidence of wants means whata person desires to sell is
exactly what the other wishes to buy .
2. In double coincidence of wants both parties have to agree to sell and buy each
others commodities .
3. In a barter systemwheregoods are directly exchanged without the useof
money , double coincidence of wants is an essential feature .
Q.3 Why is modern currency accepted as a medium of exchange without any use
of its own ?
Ans. 1. In India, theReserve Bank of India issues currency notes on behalf of the
central government.
2. As per Indian law, no other individual or organization is allowed to issue
currency .
3. The law legalizes the use of rupee as a medium of payment that cannotbe
refused in settling transactions in India .
2. 4. No individual in India can legally refusea paymentmade in rupees. Hence , the
rupee is widely accepted as a medium of exchange .
Q.4 Why do people deposit their money in banks ?
Ans. 1. Banks accept the deposit and pay an interest on the deposits .
2. Money is safein the bank .
3. People may withdraw the money as and when they require .
4. Depositors may makepayments through cheques instead of cash .
Q.5 What is a Cheque ?
Ans. A cheque is a paper instructing the bank to pay a specific amountfrom the
person’s accountto the person in whosename the cheque has been issued ..
Q.6 What do the banks do with the deposits which they accept from the public ?
Ans. 1. Banks keep only a small proportion of their deposits as cash with them .
Banks in India these days hold about 15 percent of their deposits as cash . This is
kept as provision to pay the depositors who might come to withdraw money from
the bank on any given day .
2. Since, on any particular day, only someof its many depositors cometo
withdraw cash, the bank is able to manage with this cash .
3. Banks usethe major portion of the deposits to extend loans. There is a huge
demand for loans for various economic activities .
4. Banks makeuse of the deposits to meet the loan requirements of the people.
In this way, banks mediate between those who have surplus funds and those
who are in need of these funds .
5. Banks chargea higher interest rate on loans than whatthey offer on deposits.
The difference between whatis charged fromborrowers and whatis paid to
depositors is their main sourceof income .
3. Q.7 Define Credit .
Ans. Credit refers to an agreement in which the lender supplies the borrower
with money, goods or services in return for the promiseof futurepayment.
Q.8 What is a collateral ? What happens if a borrower fails to repay the loan ?
Ans. 1. Collateral is an assetthat the borrower owns and uses itas a guarantee to
a lender until the loan is repaid .
2. If the borrower fails to repay the loan, the lender has the right to sell the asset
or collateral to obtain payment .
3. Property such as land titles, deposits with banks, livestock are common
examples of collateral used for borrowing .
Q.9 Explain the meaning of ‘Terms of Credit’ .
Ans. 1. Interestrate, collateral, documentation requirement and the mode of
repayment together comprisewhatis called the ‘Terms of Credit’ .
2. These terms vary substantially fromone credit arrangement to another .
3. They may vary depending on the nature of the lender and the borrower .
4. These are required to make the borrowers awareof the conditions to be
followed for taking the loan .
Q.10 Differentiate between the formalsector credit and informalsector credit .
Ans. FORMAL SECTOR CREDITSOURCES
1. This credit is provided by banks and co-operativesocieties to the
borrowers .
2. The Reserve Bank of India supervises thefunctioning of formalsector loans.
3. Proper terms of credit like collateral, documentation, rate of interest and
mode of payment are followed .
4. They providecheap and affordablecredit with common terms of credit for
all.
4. 5. They chargeless interest rates as compared to informalsectors.
INFORMAL SECTORCREDITSOURCES
1. This credit is provided by traders, moneylenders, employers, relatives,
friends etc.
2. There is no governmentor privateorganization which supervises the
informal sector loans.
3. Terms of credit are flexible for the personal benefit of the lenders and
pitiable condition of borrowers .
4. They exploit the borrowers for their own benefits .
5. Their rate of interest is much higher than that of formalsector .
Q11. Explain how RBI keeps a check on other banks ?
Ans. 1. The Reserve Bank of India supervises thefunctioning of formal
sources of loans. For example, the banks maintain a minimum cash
balance out of the deposits they receive . The RBI monitors the banks in
actually maintaining cash balance .
2. The RBI sees that the banks giveloans not justto profit-making
businesses and traders butalso to the small cultivators , small-scale
industries , to small borrowers etc .
3. Periodically , banks have to submit information to the RBI on how
much they are lending , to whom, at whatinterest rate etc .
Q.12 Why is cheap and affordablecredit important for a country’s
development ? Explain with reasons .
Ans. 1. More lending would lead to higher incomes and encourage
people to investin agriculture, engage in business and set up small
industries .
2. Cheap credit will enable more investment . This leads to acceleration
of economic activity .
3. Cheap credit would also allow weaker sections of society to access
formalsector of lending and get rid of informal moneylenders .
4. Affordablecredit would also end the cycle of debt trap.
5. 5. Cheap and easy terms of credit would inspirebetter investment in
technology and thus increasecompetition .
Q.13 What arethe two main reasons for formalcredit not being
available to the rural poor ? Why is there a need to expand ruralcredit ?
Ans . The two main reasons for formalcredit not being available to rural
poor are :--
1. Absence of collateral and documentation is the main reason which
prevents ruralpoor from getting loans frombanks .
2. The arrangements of informal sector loans are flexible in terms of
timeline , proceduralrequirements , interest rate etc .
3. They are adjustableaccording to the needs and convenience of the
borrower. This attracts the borrowers .
There is a need to expand ruralcredit fromthe side of formalsector
because of the following reasons :---
1. Informalsector exploit ruralpoor by pushing them in debt–trap .
2. Cheap and affordablecredit for ruralpoor is important for the
country’s overalldevelopment .
3. With this credit , the ruralpoor can grow crops , do business or
set up small-scaleindustries .
Q.14 Why is it necessary for the banks and co-operatives to
increase their lending facilities in rural areas ? Explain .
Ans . 1. Formalsources arefar behind in meeting the needs of
the people in rural areas . Informalsources likemoneylenders ,
traders have taken the ruralareas under their influence .
2. Informalsources chargea high rate of interest fromthe
borrowers which makes it difficult for them to repay the loan .
They get trapped in the debt-trap .
3. Informalsources arenotunder any supervision fromany
authorized institution .
4. The rich havebetter access to formalsources whereas poor
are forced to depend on informalsources .
6. 5. Equal distribution of credit facilities is, therefore, required and
is the need of the hour, so that the poor can also avail cheap and
timely credit facilities.
6. Formal sources of credit can help people in ruralareas to avail
other benefits like cold storagefacilities, subsidized seeds and
other agricultural inputs.
Q.14 Discuss thefunctioning of Self-Help Groups.
Ans. A Self-Help Group is an innovativeway to organizeruraland urban
poor, particularly women-
1. Typically, a SHG has 15-20 members belonging to one neigbourhood.
They meet and pool their savings regularly. Savings per member may
vary as per the capacity of the member.
2. The group advances loan to its members at a nominal interest rate
without any collateral.
3. Most of the important decisions regarding savings and loan activities
are taken by the group members themselves. The group decides
whether loan is to be granted or not, purpose, amount, interest to be
charged, repaymentschedule.
4. Itis the group that is responsiblefor the repaymentof the loan. In
case of non-repaymentby any member, all the members seriously
follow up the repayment.
5. The regular meetings of the group provides a platform to discuss and
act on a variety of socialissues such as health, nutrition, domestic
violence, etc.
Q.15 How are self help groups useful? ORWhat are the advantages of the self
help groups.
Ans. 1. The SHGs help borrowers overcometheproblem of lack of collateral. They
can get timely loans for a variety of purposes and at a reasonable interest rate.
2. Moreover, SHGs arethe building blocks of organization of the ruralpoor.
7. 3. Not only does it help women to become financially self-reliant, the regular
meetings of the group providea platformto discuss and act on a variety of social
issues such as health, nutrition, domestic violence etc.