3 Money and Credit

CHAPTER AT A GLANCE

Medium of Exchange

t is a system of mutual exchange where It is anything which has common acceptability as a

Barter system > Money
goods are exchanged for goods directly. means of exchange, a measure and store of value.

Limitations of Barter System

Lack of double Lack of store of Lack of standard for Lack of a common

coincidence of wants value deferred payments unit of value

Modern forms of Money

Deposits with banks Currency

000
People deposit extra It is authorised by the Indian
cash in banks
government. For example,
OAO90000 paper notes and coins.
Can be withdrawn Demand deposits

Can be used for payments Transfer Cheque Demand draft Money order

Loan Activities of a Bank

Interest earned

Money deposited
Depositors- Bank Money loaned
Borrowers

Interest paid

Interest to depositors is Low.

Interest from borrowers is High.
.Difference of interest from borrowers and depositors is Banks' income.
 Credit

Formal Terms of Credit Informal

Collateral
Features Documentation
Types Types Features
ww%.w Tenure
Mode of repayment
Banks Low rate of interest High rate of interest
Rate of interest Moneylenders
Cooperatives Easy repayment Repayment is not easy Friends
Documentation required No documentation Traders
Relatives

Self-Help Groups (SHGs)

Functioning Objectives Advantages

15-20 members
.Neighbours who meet and save
regularly
Savings R 25 to R 100 (varies per
member)
Grants small loans to members
Does not ask for collateral
Any non-repayment is seriously
followed up by other members
To create sensitive forum for addressing needs Develops the habit of taking intiative
of people Inculcates the sense of responsibility
To enhance participation Enables ownership of assets
To inculcate saving habits in community Helps in capacity building9
To enhance capabilities of women Develops self-confidence and
To generate sense of collective action self-esteem
To act as a successful base Promotes mutual help
To improve socio-economic status Encourages resource pooling
To access resources Provides channel for ftunctioning
 It has been accepted as a medium of exchange because: pay an amount (as an interest)
these deposits, In
on

(a) Goods and services are being bought and sold this way, people's money is safe with the banks
and
with the use of money easily. also earns an amount in the form of interest.
(6) Money solves the problem of double coincidence 52. Explain with examples, how
of wants.
people are involved
with the banks.
(c) Money is sometimes paid as advance with the
Ans. People are involved with the banks in the
promise of delivery of goods later. following
(d) It is a perfect store of value. ways:
(e) It makes economic activities quite independent (a) Depositors:
The people with excess
money
from each other. deposit it in the banks for safety. In tum they
earn interest on the amount
49. How can money be easily exchanged for goods and deposited.
(b) Borrowers: At the same time, there are people
services? Give an example to explain. who need money for various activities.
Delhi 2013, 16 They
approach the banks for eredit. The bank charges
Or interest from the borrowers.
Why are transactions made in money? Explain 53. What do you think would happen ifall the depositors
with suitable examples. went to ask for their money at the same time?
Ans. The banks keep only
15 per cent of the total deposits
Or
as provisions to pay the depositors, but if all the
How is money used medium of
as a
exchange? depositors go to ask for their money at the same
Explain with examples. time, then the banks will not be able to cater to the
Ans. Money is used as a medium of exchange because it withdrawal needs of the depositors. This may also
serves as a common medium through which people affect the lending process of the banks as it will have
can carry out buying and selling. Use of money makes to use the major portion of the
deposited money for
economic activities independent of each other. At the demand deposits.
same time, it removes the inconvenience caused
by 54. How do the deposits with the banks become their
the barter system.
source of income?
For example, person wants to sell sugar and buy
a
Ans. Banks the major portion of the deposits with
use
wheat. He has to look for a person who wants sugar
them to extend loans. As there is a
and has wheat to sell. In contrast, if in an economy, huge demand for
loans for various economic activities, the banks make
where money is used, the person who wants to sell
use of the
sugar only has to look for a buyer for his sugar. The deposits with them to meet the above loan
requirements. In this way, the banks mediate between
money which he will get can be used to purchase the
the depositors and the borrowers. Banks charge a
wheat or any other commodity in the market. Since,
higher interest rate on loans than what they pay on the
money is used in the exchange process it is called a
deposits. The difference between interest rate charged
medium of exchange.
from the borrowers and what is paid to the depositors
50. How does money solve the problem of 'double is, thus, the main source of income for the banks.
coincidence of wants'? Explain with an example. 55. How is money transferred from bank account one
Delhi 2014 to another bank account? with
Explain an example.
Ans. Refer to Ans. 2 (NCERT) Ans. For payment through cheque, the payer who has an
51. What are demand deposits? How is money safe account in the bank, draws out a
cheque for a specihc
with the banks? Explain. Foreign 2013 amount. The cheque is a statement asking the bank
to
Ans. The deposits in the bank accounts which can be pay a specific amount from the person's account
to the person in whose has been
withdrawn on demand are called demand deposits. name the cheque
issued.
People deposit their surplus cash at the beginning of For example, Aman has to pay a specific amount of
the month with the banks, where they have an account
in their names. Banks accept these deposits and also money to Shruti, say 60,000. Aman will write a
cheque in the name of Shurti. It means Aman instructs

his bank to pay the money to Shurti. Shurti will deposit
the cheque in her bank. After two or three days, the
money will be transferred from Aman's account to
Shurti's account.
56. Given that a large number of people in our country
are poor, does it in any way affect their capacity
to borrow?
Ans. Credit is always given after properly assessing the
repayment capacity of the borrower. Since, poor
people do not have repayment capacity, they are
usually unable to get a loan, especially from the formal
sector. They get some loan from the informal sector
but in that case, they often fall in debt-trap because
of very high rate of interest.
57. Explain the procedure involved in the issuing of a
cheque.
Ans. For making payments through a cheque
(a) the payer, who is an account-holder with the
bank, issues a cheque from his cheque book for
a specific amount.
(b) 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.
(c) 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.
58. Explain the meaning of 'terms of credit.
Ans. Interest rate,
collateral, documentation requirement
and the mode of repayment together comprise what
is called the "terms of credit". These terms vary
substantially from one credit arrangement to another.
They may vary depending on the nature of the lender
and the borrower. These are required to make the
borrowers aware of the conditions to be followed for
taking the loan.
59. When does credit push the borrower into a debt
trap? Explain with the help of an example.
Ans. In situation with high risks, credit might create
problems and pushes the borTOwer into a debt-trap.
He is much worse off than before. For example,
crop production involves high costs on inputs such
as fertilizers, pesticides, water etc. Farmers generally
take loans at the beginning of the season and repay
the loan after harvest. But the failure of the crop
makes loan repayment impossible. They have
to
loan
sell part of the land to repay the loan or a fresh
and the
may be required to repay the previous loan,
borrower may find himself caught in a vicious
circle
and recovery from such a situation is very painful.
60. Which government body supervises the functioning
of formal sources of loans in India? Explain its
functioning.
Ans. Reserve Bank of India supervises the functioning of
formal sources of loans in India. The RBI plays the
following rule:
It issues currency notes behalf of the central
() on
government.
(ii) It issues guidelines for fixing rate of interest on
deposits and lending by banks.
(iit) It ensuresthat banks should minimum cash
balance out of the deposits they receive.
(iv) It ensures that the banks should give loans not
only to profit making businesses but also to poor
people and small traders.
(v) Periodically, the banks have to submit a report
to the RBI on how much they are lending, to
whom and at what interest rate.
61. Why should credit at reasonable rates be available
for all?
Ans. 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. Hence, reasonable rates are important for
all.
62. Credit has its own unique role for development.
Justify the statement with arguments.
Ans. Credit has a unique role in the economic development
of the country. It is needed by all the three sectors of
the economy. In urban sector, big businessmen and
small manufacturers need loans either to expand their
enterprises, bring new technology or diversifying their
businesses.
In rural sector, the main demand for credit is for crop
production. Crop production involves cost of seeds,
fertilizers, pesticides, water, electricity, repair of
equipments. Cheap credit would thus lead to increase
in production.
 Even tertiary sector needs loans to buy the latest
equipments and technology. Thus, we can say that
credit has a unique role in the development of a
country.
63. Explain why the supervision of the functioning of
formal of loans is
sources necessary?
Ans. The supervision of the functioning of formal sources
of loans is necessary to check
(a) whether the banks actually maintain the cash
balance.
(b) whether the banks give loans not just to profit-
making businesses and traders but also to small
cultivators, small-scale industries and small
borrowers.
(c) how much banks are lending, to whom and at
what interest rate.
64. Why do the poor households rely on informal credit
till today? Explain.
HOTS
Ans. Poor households, till today, rely mainly on informal
sources of credit, like moneylenders, because of the
following reasons.
(a) Lack of banking facilities.
(b) Even if banks are established in some rural areas,
it is very difficult to get credit from them due
to a lot of paperwork involved, which makes
taking credit from the bank very cumbersome.
(c) Informal creditors like moneylenders, happen to
know the borrowers personally, so they provide
them the loan without a collateral.
65. Prove with an argument that there is a great need
to expand formal sources of credit in rural India.
Ans. There is a great need to expand the formal sources
of credit in rural India because:
(a) There is no organisation to supervise credit
activities of the informal sector.
(b) It could lead to increasing debt among the
borrowers.
(c) The rate of interest is very high in informal
sector.
loans with informal sector
66. Compare formal sector
loans regarding rate of
interest.
Or
service conditions of formal sector loans
Why are
better than informal sector? Explain. [Ajmer 2019
Ans. In formal sector, the rate of interest is low. It is fixed
by the Reserve Bank of India, who supervises the
functioning of formal sources of loan.
In informal sector, the rate of interest is very high as
there is no organisation to supervise the functioning
of informal sources of loan.
67. Most of the poor households still depend on the
informal sector for loans, both in rural and urban
areas of India." Support the statement with three
examples.
Or
"Poor households still depend on informal sources
of credit." Support the statement with examples.
Ans. Poor households still depend on informal sources of
credit because:
(a) Bank loans require proper documentation and
collateral which is rarely available with poor
households.
(6) Informal sources of credit such as moneylenders
know the borrowers personally and are often
willing to give a loan without a collateral.
(c) Sometimes, if the borrowers are unable to return
the loan, they can get additional loans from
moneylenders.
68. How is the concept of Self-Help Groups (SHGs)
important for poor people? Give your viewpoint.
Foreign 2013, 161
Ans. The concept of Self-Help Groups (SHGs) is very
important for poor people. Self-Help Groups are
required because:
(a) they help the borrowers to overcome the problemn
of lack of collateral.
(b) they help the rural poor (especially women) to
come financially self-reliant.
(c) they provide a platform to hold regular meetings
and thus, discuss issues such as health, nutrition
and domestic violence.
69. Deseribe any three
advantages of the Self-Help
Groups (SHGs) for the poor.
Ans. The three advantages of the SHGs for the
poor are
as follows.
(a These groups help the rural poor, in particular
women, to get organised to handle the money
collected and sanction loans.
 (b) These groups help the women to become
financially self-reliant.
(c) These groups create self-employment
opportunities for the members and thus save
the poor from the clutches of the
moneylenders.
70. How do SHGs help borrowers to overcome the
problem of lack of collateral? Explain with an
example.
Ans. SHGs help borrowers to overcome the problem of
lack of collateral in the following ways:
(a) It is the group that is responsible
repayment of loan.
(b) Any case of non-payment of loan by any member
is followed up seriously by other members
(c) The formal sector is willing to lend to
members of SHGs because of their good track
record of managing the credit.
Ans. People deposit the surplus or extra money in the
banks. The banks keep the money safe and provide
interest on it. The deposits can be drawn at any time
on demand by the depositors. That is why they are
called demand deposits.
The benefits of deposits with the banks are:
They can be encashed by issuing cheques in the name
of the person to whom the payment is to be made.
They make it possible to directly settle payments
without the use of cash.
for the Since demand drafts/cheques are widely accepted as a
means of payment along with currency, they constitute
money in the modern economy.
73. Describe the vital and positive role of credit with
the
examples.
Ans. Credit plays a vital and positive role in the following
ways:

Long Answer Type Questions [5 Marks] (a) It helps people from all walks of life in setting

role in the up their business, increase their income and

71. How do banks play an important
provide support to their family needs.
economy of India? Explain. [Foreign 2015; HOTS]
(b) It makes it the people to own or
possible for
Or construct their own house and get relief from

Banks plays an important role in the economic monthly rent.

credit to
development of the country." Support the
statement
(c) People often avail themselves of
with examples. ICBSE 20201 purchase luxury items like vehicles, A.Cs, etc.,
which further raises their standard of living.
Ans. Banks play an important role in developing the
It enables to invest in human resource.
economy of India by taking the following steps: (d) us
etc.
Peopletake credit for education, training,
(a) Banks keep money of the people in safe custody
which allows enrichment of human
resource.
to be used by the depositors in future.
credit facility to
(b) They provide excellent saving and investment For example, Salim availed
needs of production.
meet the working capital
options to the depositors and thus help the nation. the ongoing expenses
(C) Banks also increase the savings ofthe depositors It helped him to meet
production on time,
by paying interest on the money deposited. of production, complete
income.
who have thereby,increasing his
a)Banks mediate between people will be useful or not, depends
surplus and those who need money. This is done Whether credit
74. different examples
through granting loans. People avail themselves situation." Give two
upon the
statement.
of these loan facilities to increase production in support of this
whether credit will be
and income. examples showing
Ans. The two
(e)Banks, being the formal of credit. give the situation are:
source
useful or not, depends upon
festival
loans at a very low rate of interest at flexible manufacturer. During the
terms and conditions. Chirag is a shoe for 3,000 pair of
shoes
receives an order
season, he
Special provisions are made through banks for in a month. He employs
two more
the upliftment of to be completed
agriculture and industry like and stitching. He takes an advance
workers for pasting
waiving of loans of the farmers. (any five) trader for 1,000 pair
of shoes.
from a large
4.Why are the deposits in the banks called 'demand payment
leather supplier
to supply leather and

eposits? What are the benefits of He asks the the

Chirag completes
the banks? deposits with payment
would be made
later.
 order in a month, makes a good profit and repay all
the money that he had borrowed.
Sapna, a small farmer, grows groundnut in her three
acres of land. She took a loan from the moneylender,
hoping to repay the loan, once the crop is harvested.
Being hit by the pest, the crop fails. Expensive
pesticides did not make any difference. Sapna is
unable to repay the moneylender and the other year,
it becomes a bigger amount. Next year again, she
took a loan for cultivation. It is not a bumber crop
this year too. Sapna earns little, but it is not enough
to repay the old loans. She had to sell a part of the
land to repay the loan. She is caught in a debt. This
situation is called debt-trap. Hence, we can say that
it depends on situation whether credit will be useful
or not.
75. Explain any four terms of credit with examples.
Ans. The four terms of credit are:
Interest rate. The borrower has to pay a sum of
money as interest along with the principal amount.
Collateral. It is an asset that the borrower owns and
uses this as a guarantee - to the lender untill the loan
is repaid.
Documentation. Proper documents of borrowing with
all the terms and conditions must be submitted.
Mode of repayment. The mode through which
the borrower will repay the loan must be clearly
mentioned. Long-term loans can be repaid in annual,
half yearly or monthly installments.

76. Differentiate between formal sector credit and informal sector credit.
Or
Mention any three points of distinction between formal sector loans and informal sector loans.

Ans. FormalSector Credit Informal Sector Credit

(a)This credit is provided by banks and cooperative (a) This credit is provided by traders, moneylenders,
societies to the borrowers. employers, relatives, friends, etc.
(6) The Reserve Bank of India (RB) supervises the (6) There is no government or private organisation
functioningg of formal sector loans. It periodically which supervises the informal sector loans.
checks the interest rate and other details of the
sources.
(c) Proper terms ofcredit like collateral, docunentation, | (c) Terms of eredit are flexible for the personal benefit
rate of interest and mode ofpayment are followed. of the lenders and pitiable condition
of borrowers.
() They provide cheap and affordable credit with (d) They exploit the borrowers for their own benefits.
common terms of credit for all.
(e) They charge less interest rates as compared to ( ) Their rate of interest is much higher than that of
informal sectors. formal sector.

77. Why is cheap and affordable credit important for (c) Cheap credit would also allow weaker sections
a country's development? Explain with reasons. of society to access formal sector of lending
and get rid of from informal moneylenders.
Or
Affordable credit would also end the cycle of
(d)
Describe the importance of formal sources of
debt trap.
eredit in the economic
development. |Delhi 2019 (e) Cheap and easy terms of credit would inspire
Ans. Cheap and affordable credit is crucial for
a
country's better investment in technology and thus
development because:
increase competition.
(a) More lending would lead to
and encourage
higher incomes 78. What are the various sources of credit in
rural
people to invest in agriculture, areas? Which one of them is the most convenient
engage in business and set up small industries.
(b) Cheap credit will enable more investment. source of credit? Why is it most convenient? Give
This two reasons.
leads to acceleration of economic
activity.
Ans, Various sources of credit in rural areas are:
sector. As a result, they charge exorbitant
(a) Agricultural traders rates of interest which vary from borrower to
(6) Moneylenders borrower.
(c) Commercial banks
(6) They, thereby, indulge in exploitative practices
d) Cooperative societies
involving unfair means to get their money back
(e) Relatives and friends
from the borrowers.
The most convenient source of credit is the
(c) As the cost of borrowing is very high in the
moneylender because of the following reasons.
informal sector, a larger part of the income of
(a) There is no need of documentation process the borrower is used to repay the loan, i.e., the
while taking loan from informal sources, such borrower has less income left for himself.
as moneylenders. (d) In certain cases, the amount to be repaid is
(b) No collateral security is required. Collateral greater than the income of the borrower. This
is an asset that the borrower owns such as
in turn leads to increasing burden of debt
land, building. livestock ete. and uses this which culminates in
as a guarantee to the lender until the loan is
a
debt-trap.
(e) In this sector, those people who wish to start
repaid.
an enterprise may not actually do so, because
79. What are the two main reasons for formal credit of the high cost of borrowing which acts as a
not being available to the rural p0or? Why is
deterrent.
there a need to expand rural credit?
81. How can the formal sector loans be made
Ans. The two main reasons for formal credit not being
beneficial for poor farmers and workers? Suggest
available to rural poor are:
any five measures.
(a Absence of collateral and documentation is the
Ans. The
n e formal sector loans can be made beneficial to
main reason which prevents rural poor from As poor farmers and workers in following ways:
getting loans from banks.
(b) The arrangements of informal sector loans (a) The process of providing loans should be made
are flexible in terms of timeline, procedural easier and accessible to them.
number of banks and cooperatives should
requirements, interest rates, etc. They are 6) Large
adjustable according to the needs and be opened in the rural areas.
convenience of the borrower. This attracts the (c) Banks and cooperatives should expand their
borrowers. facility of providing loans so as to decrease
There is a need to expand rural credit from the side dependence on informal sector.
of formal sector because of the following reasons: and small
(d) Special focus should be paid on poor
(a) Informal sectors exploit rural poor by pushing farmers along with small scale industries.
faster and
them in debt-trap. (e) Loan processing should be simple,
(b) Cheap and affordable credit for rural poor is timely.
important for the country's overall development.
82. Why is it necessary for the banks and cooperatives
(c) With this credit, the rural poor can grow erops, in rural areas?
to increase their lending facilities
do business or set up small-scale industries. Foreign 2015, 14
80. "The credit activities of the informal sector should
Explain.
sources like banks
and
be Ans. It is necessary for formal
discouraged". Support the statement with
their lending in rural
areas
Cooperatives to increase
arguments Delhi 2016; HOTS
i t is correct to state that the credit activities of the
because of the following reasons.

the
Formal s o u r e e s are far behind in meeting
informal sector should be discouraged. This can be (a) Informal
people in rural
areas.
Turther substantiated with the following points. needs of the
traders have taken
sources like moneylenders,
a) There is no
organisation as such which supervises, under their
influence.
the credit activities of the lenders in the informal the rural areas
 (b) Informal sources charge a high rate of interest
from the borrowers which makes it dificult for
them to repay the loan. They get trapped in the
debt-trap
(c) Informal sources aare not under any supervision
from any authorised institution. They behave
arbitrarily in terms of giving loans and setting
terms of credit.
(d) The rich have better access to formal sources
whereas poor are forced to depend on informal
sources. 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
Case Based Questions
credit facilities.
(e) Formal sources of credit can help people in
rural areas to avail other benefits like cold
storage facilities, subsidised seeds and other
agricultural inputs.
83. Discuss the functioning of Self-Help Groups
(SHGs). Delhi 2017
Ans. A Self-Help Group is an innovative way to organise
rural and urban poor, particularly women.
The following points sum up the functioning of
(a) They help the poor to become self-reliant in
terms of savings and generating income as the
decisions regarding savings are taken by the
group members.
(6) They avail the facilities of loans from formal
sources like banks at low rate of interest.
(c) They create self-employment opportunities by
discussion within their group.
(d) They make it possible for the poor to avail
timely finance without any collateral.
(e) The entire group is responsible for the
repayment of loan.
85. Read the passage below and answer the following
questions:
We have seen that money is something that can act
as a medium of exchange in transactions. Before the
introduction of coins, a variety of objects was used as
money. For example, since the very early ages, Indians
used grains and cattle as money. Thereafter came the
use of metallic coins-gold, silver, copper coins-a
phase which continued well into the last century

Self-Help Groups. (a) Why is money called a medium of exchange?

(a) Typically, a SHG has 15-20 members belonging () Because it acts as an intermediate in
to one neigbourhood. They meet and pool their the exchange process.
savings regularly. Savings per member may (i) Because it is made of precious metal.
member. Because it is a thing of everyday use
(ii)
vary as per the capacity of the
(iv) None of the above
(b) The group advances loan to its members at a

nominal interest rate without any collateral. (b) What does the modern forms of money
(c) Most of the important decisions regarding include?
and loan activities are taken by the () Paper notes
savings
(i) Coins
group members themselves. The group decides
whether loan is to be granted or not, purpose, (iin) Demand deposits
amount, interest to be charged, repayment (iv) All of the above
schedule etc. (c) Who issues currency notes in India on behalf
(d) It is the group that is responsible for the of the central government?
repayment of the loan. In case of non- ) Planning Commission
repayment by any member, all the members (i Reserve Bank of India
seriously follow up the repayment. (ii) State Bank of India
(e) The regular meetings of the group provides (iv) Home Ministry
as
a platform to discuss and act on a variety of (d) Which of the following objects were used
social issues such as health, nutrition, domestic money in ancient times in India?
violence, etc. ) Grain

84. Describe the advantages of Self-Help Groups for (i) Cattle

the poor. (i) Both () and (ii)
Ans. The advantages of Self-Help Groups for the poor (iv) Cheque
Ans. (a) (i), (6) (iv), () (i), ()(ii)
are