Money and Credit

NCERT QUESTIONS

1.​ How does the use of money make it easier to exchange things?
-​ Money makes it easier to exchange things by acting as a medium of exchange,
which eliminates the need for barter trading.
-​ Money is universally accepted and valued, so people can use it to buy and sell
goods and services

2.​ Why are demand deposits considered as money?

Demand deposits are considered as money due to the following reasons.

-​ These can be withdrawn from the bank whenever it is required.

-​ They are widely accepted as a means of payment, along with the currency or a
cheque instead of cash.

3.​ Why do lenders ask for collateral while lending?

-​ Lenders ask for collateral to reduce risk and ensure that borrowers repay their
loans.
-​ Collateral is an asset that the borrower owns, such as a house, vehicle, or
livestock, that the lender can seize if the borrower defaults on the loan.
-​ Collateral acts as a guarantee that the borrower will repay the loan.

4.​ Given that a large number of people in our country are poor, does it in any
way affect their capacity to borrow?
-​ Yes, it affects the borrowing capacity e as a large number of people in our
country or poor.
-​ Firstly the borrowing depends on the amount of collateral one possess.
-​ People who are poor and have nothing as their security has very little or no
borrowing capacity.
-​ The lending power is concentrated in some hands and does it affect the
borrowing capacity of a country.
-​ Poverty also affects the borrowing capacity of a country because not many
people keep their money invested or at banks and thus reducing the borrowing
or lending capacity of a country.

5.​ What are the differences between formal and informal sources of credit?
-​ Interest Rates: Formal sources, such as banks and cooperatives, charge lower
and regulated interest rates. Informal sources, like moneylenders and traders,
often charge very high interest rates, sometimes exploitative​.
-​ Regulation: Formal sources are supervised by organizations like the Reserve
Bank of India (RBI). Informal sources are not regulated and operate without
oversight​.
-​ Collateral Requirements: Formal lenders often require collateral or
documentation, making access difficult for the poor. Informal lenders usually do
not require collateral, but they exploit borrowers in other ways, such as
demanding labor or selling crops at reduced rates​.
-​ Accessibility: Formal sources are less accessible in rural areas due to fewer
banks and stringent loan terms. Informal sources are easier to approach, as they
are familiar with local borrowers​

6.​ Why should credit at reasonable rates be available for all?

-​ Economic Development: Affordable credit enables people to invest in
productive activities like farming, small-scale industries, or education, which
boosts development​.
-​ Preventing Debt Traps: High-interest rates from informal lenders lead to debt
traps, especially for poor households. Reasonable rates can prevent this​.
-​ Reducing Poverty: Cheaper credit helps the poor start small businesses or
improve their livelihoods, aiding poverty reduction​.
-​ Promoting Equality: Ensuring fair access to credit promotes social and
economic equality, bridging the gap between rich and poor households​.

7.​ Should there be a supervisor, such as the Reserve Bank of India, that looks
into the loan activities of informal lenders? Why would its task be quite
difficult?
-​ Need for Supervision: Yes, to ensure fairness and prevent exploitation of
borrowers through excessive interest rates or unethical practices​.

Challenges:

-​ Decentralized Nature: Informal lenders operate locally and often on a small

scale, making regulation complex.
-​ Lack of Documentation: Informal transactions typically lack proper records,
complicating oversight.
-​ Resistance: Informal lenders may resist supervision due to loss of profits or
autonomy.
-​ Scale of Operation: The sheer number of informal lenders spread across urban
and rural areas makes it difficult for a single body to manage

8.​ Why do you think that the share of formal sector credit is higher for the
richer households compared to the poorer households?
-​ Richer households possess assets that can be used as collateral.
-​ Wealthier individuals meet the documentation requirements of banks.
-​ Banks are more accessible in areas where richer households reside.
-​ Financial institutions view loans to richer households as lower risk.

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

10.​How does money solve the problem of double coincidence of wants?

Explain with an example.
-​ What a person desires to sell is exactly what the other wishes to buy, such a
case is known as double coincidence of wants.
-​ 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 of cereals would be very tough. 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.

11.​ Look at a 10 rupee note. What is written on top? Can you explain this
statement?
-​ “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.

12.​ How do banks mediate between those who have surplus money and those
who need money?
-​ 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.

13.​What are the reasons why the banks might not be willing to lend to certain
borrowers?
-​ 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 in the list of NPAs
4. There is high risk in approving loans to entrepreneurs.

14.​In what ways does the Reserve Bank of India supervise the functioning of
banks? Why is this necessary?
-​ 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 cash balance
2. Loans are not just given to profit making organisations but also to small cultivators
and small scale industries
3. RBI maintains periodic report of other banks regarding the amount loaned to people
4. It also keeps a regular check on the interest rates asked on loans in public sector
banks.

15.​Analyse the role of credit for development.

-​ Credit is one of the most major aspects for 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 the 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.

16.​Choose the most appropriate answer.

(i) In a SHG most of the decisions regarding savings and loan activities are taken by:
(a) Bank. (b) Members. (c) Non-government organisation.

(ii) Formal sources of credit does not include:

(a) Banks. (b) Cooperatives. (c) Employers

BOARD SAMPLE PAPER QUESTIONS:

1.​ 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.
2.​ “Self –help groups eliminate poverty and empower women”. Substantiate
with suitable answer