MONEY AND CREDIT

1. What are demand deposits?

People deposit their money in the bank as it earns interest. Since the deposits in the bank
accounts can be withdrawn on demand, these deposits are called demand deposits.

2. What is a cheque? Explain the procedure involved in the issuing of a cheque.

It is a paper, instructing the bank to pay a specific amount from the person's account to the
person on whose name the cheque has been issued.

* The payer, who is an account- holder with the bank, issues a cheque from his cheque book
for a specific amount.
* The cheque instructs the bank to pay a specific amount from the depositor's account to the
person or institution, in whose name it has been issued.
* The money, is then, transferred from one bank account to another bank account in a day or
two and the transaction is complete without any payment of cash.

3. What is credit?
Credit (loan) refers to an agreement in which the lender supplies the borrowers with money,
goods or services in return for the promise of future payment.

4. What is the basic idea behind the SHGs for the poor?

* It organises the rural poor, especially women, into small SHGs

* It collects saving of the members.
* It provides loans without collateral.
* It provides timely loans for various purposes.
* It provides loans at reasonable rate of interest and on easy terms.
* It also provides a platform to discuss and act on a variety of social issues such as
education, health, nutrition, domestic violence etc.

5. What do you mean by the term collateral?

It is an asset that the borrower owns and uses this guarantee to a lender until the loan is
repaid.

6. Why is the supervision of the functioning of formal sources of loans necessary?

Because banks have to submit information to the RBI on how much they are lending to ,
when they are lending, and what at what interest rate etc.

7. How is modern forms of currency accepted as a medium of exchange?

* Modern forms of money include currency – paper notes and coins.

* Modern currency is not made of precious metals such as gold, silver and copper.

* The modern currency is without any use of its own.

* In India, RBI issues currency notes on behalf of the Central Govt.

* As per Indian law, no other individual or organisation is allowed to issue currency.

* No individual in India legally refuse a payment made in rupees.

8. Why do we need to expand formal sources of credit in India? Give three reasons.

* The cost of informal loans is much higher and often leads to a debt trap. Also, people who
might wish to start a new enterprise by borrowing may not do so because of the high cost of
borrowing in such a case.

* Most loans from informal lenders carry a very high interest rate and do little to increase the
income of the borrowers. Thus, it is necesary that banks and cooperatives increase their
lending particularly in the rural arease , so that the dependence of the poor on informal
sources of credit reduces.

* It is important that the formal credit is distributed more equally so that the poor can benefit
from the cheaper loans.

9. “ The credit activities of the informal sector should be discouraged.” Support the
statement with arguments.

* 85% of loans taken by the poor households in the urban areas are from informal sources.
* Money lenders charge very high interest on their loans.
* There are no boundaries and restrictions.
* Higher cost of borrowing means a larger part of the earnings of the borrowers is used to
repay the loan.
* In certain cases, the high interest rate for borrowing can mean that the amount to be repaid is
greater than the income of the borrower.
* This could lead to increasing debt and debt trap, therefore the credit activities of the
informal sector should be discouraged.

10. ' Credit has its own unique role for development.' Justify the statement with
arguments.

* Credit helps to increase earning and therefore the person is better off than before.
* It helps to earn money as well as capital for the future.
* It helps in the development of infrastructure of the society that leads to the overall
development.

11. What are the advantages of SHGs?

* It helps the borrower to overcome the problem of lack of collateral

* They can get timely loans for a variety of purposes and at a reasonable interest rate.
* SHGs are the building blocks of organisation of the rural poor.
* Not only do they help women become financially self-reliant, the regular meetings of the
group provide a platform to discuss and act on a variety of social issues such as health,
nutrition, domestic violence etc.

12. What are differences between formal and informal sources of credit?

Formal sources

* These sources of credit are registered by the govt. and have to follow its rules and
regulations.
* RBI supervises the functioning of formal sources of credit.
* They generally charge lower rates of interest.
* Their main motive is social welfare.

Eg. Banks and Co-operatives.

Informal sources

* These include those small and scattered units which are largely outside the control of the
govt.
* There is no organisation which supervises the credit activities
* They charge much higher rates of interest
* Their main motive is profit- making

Eg. Money lenders, traders, employees, relatives, friends....

13. What are the terms of credit?

* Every loan agreement specifies an interest rate which the borrower must pay to the lender
along with the repayment of the principle. `

* In addition, the lender may demand collateral ie., an asset that the borrower owns and uses
this as a guarantee until the loan is repaid.

* If the borrower fails to repay the loan, the lender has the right to sell the collater
to obtain payment.

* Terms of credit comprise interest rate, collateral and documentation requirement and the
mode of repayment.

* The terms of credit vary substantially from one credit arrangement to another. They may
vary depending on the nature of the lender and the borrower.
14. “Self Help Groups helps borrowers to overcome the problem of lack of collateral.”
Examine the statement.

* Most of the important decisions regarding the savings and loan activities are taken by the
group members.

* The group decides as regards the loan to be granted- the purpose, amount, interest to be
charged, repayment schedule etc.

* It is the group which is responsible for the repayment of the loan.

* In case of default by one member, it is followed up seriously by other member in the group.

* Because of this feature, banks are willing to lend to the poor women when organised in
SHGs even though they have no collateral as such.

15. How does RBI supervises banks?

* RBI requires commercial banks to keep a certain percentage of their deposits in cash and
other liquid assets. This percentage is called statutory liquidity ratio. After keeping a part of
deposits in cash and other liquid assets, banks can use their surplus funds to give loans. This
objective is to ensure that banks can meet the withdrawal reuirements of deposit holders.

* RBI also requires commercial banks to deposit a certain percentage of their deposits with
RBI in cash. This percentage is called cash reserve ratio.

* RBI issues guidelines for fixing rate of interest on borrowings and lending by commercial
banks.

* RBI directs the commercial banks to give certain percentage of loans to priority sector
(Agriculture, small-scale industries etc.)

16. Why should credit at reasonable rates from the banks and co- operatives be available
for all?

Credit is an important aspect of economic activity. Right from a small farmer to a big
business tycoon, everyone needs to borrow at some time to improve productivity. In case of
unreasonable rates, the borrower always runs the risk of falling in the debt-trap which is not
good for the society and the economy as a whole. Cheap credit will enable more investment
that leads to acceleration of economic activity. Hence, reasonable rates are important for all.

17.` A farmer has borrowed money from a money lender at a high rate of interest, as he could not
pay the interest, he was forced to borrow from another landlord to settle the amount for the interest
borrowed to the money lender. State the consequences he may face in this situation.

Mr “X” has fallen into “Debt trap”. He is in a situation where he will not be able to repay the debt
incurred because: The informal sector was the source of credit opted by Mr “X”, where
 • The rate of interest is high
• No proper documentation is sought
• No set of rules and regulations will be followed
• The lenders were often punished and will be ill treated
• The prime motive of the informal sources of this kind of credit is to make profit

He may face the following consequences:

• Mr “X” may face ongoing harassment and physical harm from the men sent by the money
lender
• He will not be able to make regular interest payments or repay the full amount borrowed.
This could lead to significant stress and anxiety, as well as potential physical injuries.
• Borrowing from another landlord to repay the original loan may create a cycle of debt for
Mr ”X”, particularly if the interest rates on the second loan are also high.
• Mr “X” may experience personal consequences, such as mental stress, anxiety and
depression due to the constant pressure of repayments and harassment from the lenders.

17. Why do banks and co-operative societies need to lend more? Explain.

* This would lead to higher incomes.

* People could borrow cheaply for a variety of needs.
* They could grow crops and set up small- scale industries etc.
* Cheap and affordable credit is crucial for the country's development.
* To save and reduce the dependence on informal sources of credit.
* It is important that the formal credit is distributed more equally so that the poor can benefit
from the cheaper loans.

18. “Self-help groups eliminates poverty and empowers women”. Substantiate with suitable answer.
• SHGs help the poor to become self-reliant in terms of savings and generating income.
• They avail the facilities of loans from formal sources like banks at low rate of interest.
• They do not demand collateral and so it is easy to access by the poor.
• SHGs are exclusively meant for rural women to make them economically independent through
self-employment opportunities.
• Helps to improve other development factors such as literacy levels, improved healthcare and
better family planning.
• Economic empowerment: SHGs provide women with a platform to save and access credit at
affordable rates, which enables them to start and expand small businesses. Thus improving the
standard of living.
• Skill development: SHGs in India have also been successful in providing skill development and
training opportunities to women. Through training programs, women are equipped with the
necessary skills to start and run successful businesses.

• Social empowerment: By providing a platform for women to come together, share their
experiences and support each other, SHGs have empowered women to take charge of their lives
and become active participants in their communities
19. Why is modern currency accepted as a medium of exchange without any use of its own?
Find out the reason.
• It is authorized by the govt of India.
• It is issued by the apex bank on behalf of the govt
• No other individual is allowed to issue currency
 • The law of the country legalizes its use as a medium of payment and setting transactions
• No one in a country can refuse payment made in the currency of that country

20. How is ‘double coincidence of wants’ not appreciable in the contemporary scenario?

As it is not possible that what a person desires to sell is exactly what the other wishes to buy.

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

People with surplus money deposit their money in the bank. Banks keep small portion of such
deposits as cash for themselves to pay the depositors on demand. The rest of the deposited money
is used to extend loans to those who need money. The banks offer interest to those people who
deposit their surplus money with them and charge an interest from those who take loan from
them.

22. In situations like high risks, credit might create further problems for the borrower. Explain.

Credit helps the people to increase their earnings but in some situations, it pushes the people
into debt-trap.
If people are not able to repay the loan, they have to sell their assets or land.
For example, in rural areas, the main demand for credit is for crop production which involves
considerable cost on seeds, fertilizers, pesticides tec. Farmers take such loans at the very
beginning of the season and repay the loan after harvest.
Loan repayment is fully dependent on the income from farming. But crop failure makes it
impossible to repay their loan. As a result, farmers often are forced to sell a piece of land to
repay the loan or commit suicide.
Credit here plays a negative role and lowers down the financial position of the farmers. It
pushes them in a state from which recovery of loan is very painful.
23. What is money? Why is modern money currency accepted as a medium of exchange?

Money is anything which has common acceptability, as a means of exchange, a measure and a
store of value.
It has been accepted as a medium of exchange because:
• Goods and services are being brought and sold with the use of money easily.
• Money solves the problems of double coincidence of wants.
• Money is sometimes paid as advance with the promise of delivery of goods later.
• It is a perfect store of value.
• It makes economic activities quite independent from each other.

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