GRADE: X MONEY AND CREDIT ECONOMICS

(CBSE Board Questions)

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1 .What are the functions of money?

• Medium of Exchange- Money acts as an intermediate in the exchange process hence it is

called as a medium of exchange.
• Transactions are easy- The use of money has made the transactions of buying and selling
easier.
• Fix the Value of goods – It measures the value of the goods and services and accordingly
makes it easier for the producers to fix the value of their product.
• It is a store of value –People can have money in their pockets, at home, in the banks, etc.
• National Income – We can assess/judge/calculate the distribution of national income
through the money.

2. How can money be easily exchanged for goods or services? Give an example to explain.

Transactions are made in money because a person holding money can easily exchange it for any
commodity or a service.
• It solves the problem of double coincidence of wants by acting as a medium of exchange.
• For example, a shoe manufacturer wants to sell shoes in the market and wants to buy rice.
• Under barter system, both parties selling shoes and rice have to agree to buy and sell each
other’s commodities and this creates a problem which is referred to as double coincidence
of wants.
• This problem is overcome by the introduction of money. Now, the shoe manufacturer
will sell the shoes for money and with that money he can buy rice.

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

Money acts as a medium of exchange thereby playing a vital role in the solving the problem of
double coincidence of wants.
• Money can be exchanged for any kind of commodity or service of one’s choice or need.
• Before money was introduced, people practiced barter system. In the barter system,
double coincidence of wants was an essential feature. In such an economy we must find
out a person who is ready to buy our goods in exchange the goods that he has to sell is
exactly what we are looking for.
• In contrast, in any economy where money is in use, it acts as an intermediate in the
exchange process and eliminates the need of double coincidence of wants.
• For e.g. A wheat producer wants to buy clothes. All he has to do is sell his wheat get the
money for it and with that money go and buy the clothes that he wishes to buy. He

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 doesn’t have to go in search of a person who is selling clothes and at the same time
wanting to buy the wheat that he has to sell.

4. How are people involved with the banks?

• Banks help people to save their money and keep their money in safe custody of the bank.
Banks accept deposits from the public and also help people to earn interest on their
deposits.
• People can withdraw the money deposited with the bank at the time of their need. As the
money can be withdrawn on demand, these are called demand deposits.
• Banks also grant loans to people for a variety of purposes. In times of need individuals,
business houses and industries can borrow money from the banks.

5. What are the modern forms of money and why is the ‘rupee’ widely accepted as a medium
of exchange?
Modern forms of money include currency — paper notes and coins.
• Unlike the things that were used as money earlier, modern currency is not made of
precious metal such as gold, silver and copper. And unlike grain and cattle, they are
neither of everyday use. The modern currency is without any use of its own.
The rupee is widely accepted as a medium of exchange as:
• Authorized by the government – It is authorized by the Central government. The
Reserve Bank of India issues notes on behalf of the Central government.
• Legal support –The law legalizes the use of money as a medium of exchange and cannot
be refused in settling transactions in India.
• No Individual in India can legally refuse a payment made in rupees.

6. How are deposits with the banks beneficial for individual as well as for the nation?
Deposits with the banks are beneficial to the depositors as well as to the nation in various ways.
• They provide safe and secure deposits to a person’s money.
• They provide excellent saving and investment options and thus helps not only the
individual but also helps in the growth of the nation.
• They provide interests on the deposited money to the depositors.
• Money can be easily withdrawn from the banks as and when required by the depositors.
• They provide easy loans on nominal rates that make it possible for the common man to
build their own assets.

7. How do banks play an important role in the economy of India? Explain

Banks play an important role in developing the economy of India in the following ways:

• Banks accept money of the people and keep it in safe custody to be used by the
depositors in future.
• Banks also increase the savings of the depositors by paying interest on the money
deposited.

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 • Banks mediate between people who have surplus and those who need money. This is
done through granting loans. People avail themselves of these loan facilities to increase
production and income.
• Banks, being the formal source of credit, give loans at a very low rate of interest at
flexible terms and conditions.
• Special provisions are made through banks for the upliftment of agriculture and industry
like waiving of loans of the farmers.

8. Explain the loan activities of a Bank?

Banks mediate between those who have surplus money and those who need money
• Banks keep only a small proportion (15%) of their deposits as cash with them.
• They use the major portion of the deposits to extend loans. In this way, banks mediate
• between those who have surplus funds (the depositors) and those who are in need of
these funds (the borrowers)
• Banks charge a higher interest rate on loans that they offer and give a lower rate of
interest to the deposits that they accept.
• The difference between what is charged from the borrowers and what is paid to
depositors is their main source of income.

9. What is credit? How does credit play a vital and positive role? Explain with an example.
Credit refers to an agreement in which the lender supplies the borrower with money, goods or
services in return for the promise of future payment.
Credit plays a vital and positive role in the following ways:
• It helps people from all walks of life in setting up their business, increase their income
and provide support to their family needs. Credit helps to increase earnings and therefore
the person is better off than before.
• 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.
• People often avail themselves of credit to purchase luxury items which further raises their
standard of living.
• It enables us to invest in human resource. People take credit for education, training, etc.
which allows enrichment of human resource.
• For example, Salim availed credit facility to meet the working capital needs of
production. It helped him to meet the ongoing expenses of production, complete
production on time, thereby, increase his income.

10 When does the credit push the borrower into a debt trap? Explain with example.
Credit may push the borrower into a situation from which recovery is very painful. (Swapna’s
example on page 43). In this case because of the crop failure, credit pushes the person into a
debt trap and she is clearly much worse off than she was before.
• To repay her loan she has to sell a portion of her land.
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 • Whether credit would be useful or not, therefore, depends on the risks in the situation
and whether there is some support, in case of loss.
• Debt trap – inability of an individual to pay back the first loan leads the person going in
for a 2nd loan/or sell a portion of the land.

11. Why should credit at reasonable rates be available for all? / Why should the formal sector
increase its lending power in the rural areas? / Analyze the role of credit for development
(Below points are common ones for the above questions – however you need to compile
your answer based on the question given)
• Credit can be grouped as formal and informal.
• Formal sector credit can be availed of from banks and cooperatives which charge low rate
of interest whereas the informal lenders include moneylenders, traders, etc who charge
high rate.
• Rich households and well off people can avail cheap credit from the formal sources
whereas the poor households have to borrow from informal sources as they may not have
the collateral to provide or the required documents.
• Very often the poor people may have to pay high interest mking the amount to be repaid
greater than the income of the borrower which pushes him into debts.
• This will create many economic and social disparities among the people and hence credit
should be made available for all at reasonable rates so that even the poor get the benefit
of cheaper loans.
• Cheap and affordable credit plays a crucial role for the country’s development.
• This would lead to higher income and many people could then borrow cheaply for
variety of needs. They could grow crops, do business and set up small scale industries.
They could also trade in goods.
• Thus it becomes imperative for the formal sectors to increase their lending particularly
in the rural areas so that the poor people dependence on the informal sector reduces to a
great extent.

12. What is collateral and Terms of credit?

• Terms of credit -These are the conditions which need to be fulfilled when credit/loan is
taken. Interest rate, collateral, documentation requirement and the mode of repayment
together comprise what is called the terms of credit.
• Collateral - Lenders may demand collateral (security) against loans. Collateral is an asset
that the borrower owns (such as land, building, vehicle, livestock, deposits with banks)
and uses this as a guarantee to a lender until the loan is repaid. If the borrower fails to
repay the loan, the lender has the right to sell the asset or collateral to obtain payment.
-Property such as land titles, deposits with banks, livestock are some common examples
of collateral used for borrowing.

13. Who supervises the functioning of banks in India? Why is supervision of banks
necessary?
The Reserve Bank of India supervises the functioning of formal sources of loans
Supervising /Supervision of banks is necessary for the following reasons:

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 • To protect small depositors, farmers, small scale industries, small borrowers, etc. so that
they too can avail the loan facility provided by the banks.
• To keep a tab on whether the banks are adhering to the 15% cash balance that they have
to maintain out of the deposits that they receive.
• Sometimes driven by profit motive and competition they may not follow a common
policy according to national requirement, therefore the RBI which will compel them to
follow the appropriate policy under economic situation is necessary.

14. Differentiate between the Formal and Informal sources of credit

Formal Sources of Credit Informal Sources of Credit

• Banks, cooperatives are formal
sources of credit.
• These are under the supervision of
the RBI
• Since the collateral provides the
required security no unfair means is
involved to get the loan amount back.
• They charge a rate of interest which is
fixed by the RBI and usually it is not
very high.
• Rich urban households availing
cheap credit from formal lenders
because they could meet the terms of
credit
• Moneylenders, traders, relatives,
friends, landlords, etc.
• There is no supervision by any
authority.
• They might use unfair means to get
the loan amount back.
• They charge variable rates of interest
and the rates are usually very high.
• Poor households largely depend on
informal sources of credit.

15 How can the formal sector loans be made beneficial for poor farmers and workers? Suggest
any five measures.
Formal sector loans can be made beneficial for poor farmers and workers in the following ways:
• Create greater awareness among farmers about formal sector loans.
• Process of providing loans should be made easier. It should be simple, fast and timely.
• More number of Nationalized Banks/cooperative banks should be opened in rural
sectors. Banks and cooperatives should increase facility of providing loans so that
dependence on informal sources of credit reduces.
• The benefits of loans should be extended to poor farmers and small scale industries.
• While formal sector loans need to expand, it is also necessary that everyone receives these
loans. It is important that formal credit is distributed more equally so that the poor can
benefit from cheaper loans.
• It is necessary that banks and cooperatives increase their lending particularly in the rural
areas, so that the dependence on informal sources of credit reduces.

16. Why the banks might not be willing to lend to certain borrowers?
Banks may be unwilling to lend to certain borrowers because of:

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 • Lack of collateral: Banks may not want to lend to those people who cannot provide
adequate collateral as security against the loan.
• Previous record: The borrowers who have not repaid their previous loans or gave the
bank a bad experience may also be refused loans by the bank.
• Risk Factor: Banks may hesitate to lend to those entrepreneurs who are going to invest in
the business with high risk.
• More profit: The main objective of the bank is to earn more profit. It has to pay the
corporation tax like any other company, dividends to shareholders, salaries to the staff
and other expenses. For this purpose, it has to adopt judicious loan and investment
policies which ensure fair and stable return of the loans.

17. What is SHG? Evaluate the Functions of SHG.

SHGs are Self Help groups
• The basic idea behind the SHGs for the poor is to organize rural poor especially women,
into small Self Help Groups and collect their savings. They also provide timely loans at a
reasonable interest rate without collateral.
The main Functions of SHG are:
• A typical SHG has 15-20 members, usually belonging to one neighbourhood, who meet
and save regularly. Saving per member varies from Rs 25 to Rs 100 or more, depending
on the ability of the people to save
• Members can take small loans from the group itself to meet their needs. The group
charges interest on these loans but this is still less than what the moneylender charges.
• After a year or two, if the group is regular in savings, it becomes eligible for availing loan
from the bank. Loan is sanctioned in the name of the group and is meant to create self-
employment opportunities for the members.
• Most of the important decisions regarding the savings and loan activities are taken by the
group members.
• It is the group which is responsible for the repayment of the loan. Any case of non-
repayment of loan by any one member is followed up seriously by other members 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.
• Thus, the SHGs help borrowers 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 does it help
women to 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

18. Should there be a supervisor, such as the Reserve Bank of India that looks into the loan
activities of informal lenders. What are the challenges in doing this?
Yes, there should be a supervisor to keep a check on the terms of credit, rate of interest charged,
and collateral taken and the repayment terms, etc. as performed by the RBI for the banks.
• In the absence of such supervision they lend at whatever interest rate they choose and fix,
they are privileged to use unfair means to get their money back; the interest rate on loans
is much higher
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It would be a practically difficult / challenging task as:
• Anyone with surplus funds can become a lender and so keeping track/account of these is
difficult.
• Compliance/agreement of people to supervision of their accounts might not always be
available.
• Widespread area/large population, presence of unaccounted details of the money given
out as loans also makes the task difficult.

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