66

MONEY AND CREDIT

1. SHGs refer to:
(a) Groups of rural poor people who work together in the credit sector
(b) Groups of rich people who work together
(c) A formal credit sector (d) None of the above
2. Banks and Co-operatives come under –
(a) Formal credit sector (b) Informal credit
(c) Both (a) and (b) (d) None of the above
3. Which one of the following terms is not included against Loans?
(a) Interest rate (b) Collateral (c) Documentation (d) Lender's land.
4. What is the main source of income for banks?
(a) Interest on loans. (b) Interest on deposits.
(c) Difference between the interests charged on borrowers and depositors.
(d) None of these.
5. Majority of the credit needs of the poor households are met from :
(a) Formal sources (b) Informal sources (c) Self help groups (d) None of the above
6. Banks use the major portion of the deposits to :
(a) Keep as reserve so that people may withdraw (b) Meet their routine expenses
(c) Extend loans (d) Meet renovation of bank
7. It is an asset that the borrower owns and uses this as a guarantee to the lender until
the loan is repaid.
(a) Terms of credit (b) Double coincidence of wants (c) Collateral (d) Debt – trap.
8. Why Cheap and affordable credit is crucial for the country’s development?
(a) For increasing agricultural production. (b) Setting up new industries.
(c) For trading in goods. (d) For all of the above.
9. In a barter system :
(a) goods are exchanged for money. (b) goods are exchanged for foreign currency.
(c) goods are exchanged without the use of money. (d) goods are exchanged on
credit.
10. About what percentage of their deposits is kept as cash by the banks in India?
(a) 25% (b) 20% (c) 15% (d) 10%
11. Who among following, issues currency notes in India ?
 67

(a) Prime Minister of India (b) Reserve Bank of India

(c) State Banka of India (d) Central Bank of India.
12. Which one of the following organisations supervises the functioning of formal
sources of loans?
(a) State Bank of India (b) Central Bank of India
(c) Reserve Bank Of India (d) Grameen Bank
13. Which is the major reason that prevents poor from getting loans from the banks?
(a) Absence of Collaterals (b) Lack of capital
(c) Absence of mediatiors (d) Interference of the local moneylenders in the markets
14. Which one of the following will provide formal sector loan ?
(a) Money lenders and traders. (b) Banks and Co-operatives.
(c) Relatives and Friends. (d) Land lords and Relatives.
15. Which one of the following is correct about the double coincidence of wants?
(a) A person desires to sell what the other wishes to buy without goods.
(b) A person desires to sell double of his goods to other.
(c) Both parties agree to sell and buy each other commodities
(d) All the above.
16. Which one of the following institutions is authorised to issue currency notes?
(a) Reserve Bank of India (b) Parliament of India
(c) President of India (d) State Bank of India
17. Which of the following reasons is correct for accepting currency as a medium of
exchange?
(a) Authorised by the President (b) Authorised by the Parliament
( c) Authorised by the government of the country
(d) Authorised by the state government
18. Who takes the important decisions regarding the savings and loan activities in
Self-Help Group ?
(a) Community (b) Bank (c) Village (d) Group members
19. Which of the following is the appropriate meaning of collateral ?
(a) Bank (b) Cheque (c) Security (d) Loan
20. Which of the following is NOT the motive of Self-Help Group ?
(a) It does not help women to become financially self-reliant.
 68

(b) The group provides a platform to discuss on variety of social issues such as health,
nutrition etc.
(c) It helps borrowers overcome the problem of lack of collateral.
(d) It provides timely loans at a reasonable interest rate.
21. If the borrower fails to repay loans, the lender has the right to :
(a) compel the borrower to repay the loan
(b) file the case in the court against the borrowers.
(c) sell the collateral to obtain the payment.
(d) stop lending loans.
22. How many members atypical SHG has
(a) 14 – 19 (b) 15 – 20 (c) 20 – 25 (d) 25 - 30
23. Which of the following is the reason for accepting paper notes as a medium of
exchange ?
(a) It is easy to keep (b) It is useful
(c) It is authorised by the government of the country (d) It is authorised by an
agency.
24. What is the facility of cheques against demand deposits ?
(a) It directly settles payment (b) It is easy to keep
(c) It is safe (d) None of the above
25. Commodity for commodity is known as __________.
(a) Barter system (b) Money system (c) Exchange Rate (d) Financial system
26. Which of the following has an essential feature of double coincidence?
(a) Money System (b) Barter System of exchange
(c) Financial system (d) Banking system
27. What percent of their deposits do Commercial Banks hold as cash in India ?
(a) 50 percent (b) 80 percent (c) 15 percent (d) 60 percent
28. Which of the following work as a mediator between those who have surplus funds
and those who are in need of these funds ?
(a) Commercial banks (b) Reserve Bank of India (RBI) (c) Landlords (d)
Government of India
29. What is a cheque ?
 69

(a) It is a paper instructing the bank to deposit money. (b) It is a paper issued by a
bank against a loan. (c) It is a paper instructing the bank to pay money. (d) It is a
rate of interest
30. Terms of credit does not include :
(a) Interest rate (b) Collateral (c) Cheque (d) Mode of repayment
31. Almost all of the borrowers of Grameen Bank of Bangladesh are :
(a) Men (b) Women (c) Senior Citizens (d) All of them
32. Deposits in the bank is also known as :
(a) Demand deposits (b) Cash deposits (c) Safe deposits (d) None of the above
33. Cheap and affordable credit is crucial for country’s development because :
(a) Farmers in the rural India can borrow for crop production (b) People can set up
industries and trade in goods (c) Both of the above (d) None of the above
34. The Reserve Bank of India issues currency notes on behalf of the ___________ .
(a) President (b) State Government (c) Central Government (d) Chief Justice of
India
35. SHG stands for __________
. (a) High rate of Interest (b) Overcoming the problem of lack of collateral
(c) An Agency of Central Government (d) A formal source of Credit
36. In a SHG, most of the decisions regarding savings and loan activities are taken by
(a) Bank (b) members (c) Non government organization (d) none of these
37. Deposits in bank accounts withdrawn on demand are called :
(a) Fixed deposits (b) Recurring deposits (c) Demand deposits (d) None of these
38. Informal sector loans comprise loans from :
(a) money lenders and traders (b) employers (c) relatives and friends (d) all of these
39. What is percent age of the loans is taken from informal sources by the poor
households in urban area ?
(a) 90 (b) 47 (c) 72 (d) 85
40. An essential feature of the barter system is :
(a) A person holding money can easily exchange it with any commodity.
(b) Reserve Bank (b) Double co – incidence of wants.
(c) Medium of exchange of goods with money.
41. Which one is the main reason that pushes the poor to take loan from informal
sector?
 70

(a) Lack of intermediary (b) Absence of collateral (c) High rate of interest (d)
Cumbersome
42. In which one of the following systems “exchange of goods‟ is done without use of
money ?
(a) Credit system (b) Barter system (c) Banking system (d) collateral system
43. Cheap and affordable credit results in which one of the following?
(a) Slow economic growth (b) Good economic growth
(c) Poverty (d) Creating a debt trap
44. Why do members prefer to take loan from Self Help Group ?
(a) No rate of interest is charged. (b) Rate of interest is less than what the informal
sources charge. (c) Rate of interest is more than what the formal sources charge.
(d) Most of the members are women.
45. Which of the following is not a feature of SHG ?
(a) The group charges low rate of interest from its members. (b) They are controlled
by RBI. (c) After a year or two, if the group is regular in saving it becomes eligible
for availing loan from the bank. (d) Most of the members are women.
46. Which of the following is formal source of credit ?
(a) Money Lenders (Sahukars) (b) Banks (c) Relatives (d) Employers
47. Which one of the following is the feature of modern form of money’ ?
(a) It includes paper notes and coins. (b) It includes paper notes only
(c) It includes gold and silver only ( d) It includes coins only
48. Which of the following is the main source of credit for the rich household?
(a) Informal Sector (b) Formal Sector (c) Self Help groups (d) Local Moneylenders
49. Which one of the following does provide formal sector loan ?
(a) Money lenders and traders. (b) Banks and Co-operatives.
(c) Relatives and Friends. (d) Land lords and Relatives.
50. Which one of the following is a form of modern money?
(a) Silver (b) Gold (c) Precious stones (d) Paper notes
51. Which one of the following organisations supervises the credit activities of
informal sector ?
(a) Cooperative societies (b) Commercial Banks
(c) State Bank of India (d) None of the above
 71

52. Which one of the following removes the problem of double coincidence of wants ?
(a) Barter system (b) Bank (c) ATM (d) Money
53. Which one of the following terms is not included against Loans?
(a) Interest rate (b) Collateral (c) Documentation (d) Lender's land.
54. What is the main source of income for banks ?
(a) Interest on loans. (b) Interest on deposits. (c) Difference between the interest
charged on borrowers and depositors. (d) None of these.
55. SHGs help as a building block for the rural poor as they __________.
(a) help the women to become financially self reliant (b) serves as a platform to
discuss social issues (c) forms a group to create awareness in the village (d) All of the
above
56. Documentation requirement mode of payment and interest rates together is called
as __________.
(a) Collateral (b) Credit (c) Terms of credit (d) None of the above
57. A medium of exchange used in economic transaction refers to
(a) Barter system (b) Credit (c) Trading (d) money
58. Deposits in bank account withdrawn on demand this type of deposits are called :
(a) Fixed deposits (b) Recurring deposits (c) Demand deposits (d) None of these
59. Choose the correct option - In a barter system –
(a) Goods are exchanged for money (b) Goods are exchanged for foreign currency
(c) Goods are exchanged without the use of money. (d) Goods are exchanged on
credit
60. Which of the following is NOT the motive of Self-Help group ?
(a) It does not help women to become financially self-reliant. (b) The group
provides a platform to discuss on variety of social issues such as health, nutrition etc.
(c) It helps borrowers overcome the problem of lack of collateral. (d) It provides
timely loans at a reasonable interest rate.
QUESTIONS AND ANSWERS
1. What do you mean by Barter System?
Barter system is a system in which goods are exchanged for other goods.
2. What are the main drawbacks (demerits) of the Barter System?
 72

a. Lack of double coincidence of wants: Mr. A wants to exchange rice for sugar. He
has to find out a person who wants rice and has sugar to give back in return. It is very
difficult.
b. Very difficult to store value:- Storing surplus value in the form of goods is very
difficult or impossible.
c. Future payment is very difficult in Barter System.
d. Lack of a common unit of value:- It is very difficult to express the value of a
product.
3. What is money? What are the main functions of money?
Anything which used as a medium of exchange, store of value and standard of
differed payment is called money.
Functions of Money
a. Medium of exchange:- Money makes exchange of goods and services easy and
quick.
b. Store of value:- Surplus value can be stored in the form of money.
c. Standard of differed payments:- Repayments of loans become easy due to the use of
money.
4. How does the use of money make it easier to exchange goods?
OR
How does money solve the problem of lack of double coincidence of wants?
OR
What is double coincidence of wants?
Money acts as the medium of exchange and removes the difficulty caused by lack of
double coincidence of wants. Suppose, a person has rice and wants sugar, he can sell
his rice and earn money. By using that money he can buy sugar from another seller.
5. Can you think of some examples of goods or services being exchanged or wages
paid through Barter?
a. Under the food for work programme of the central government, workers are given
wages in the form of food materials.
b. In village areas small farmer exchange food crops for other food crops.
c. Some sellers provide plastic products in return for old clothes or old newspaper.
d. In village areas coconut pluckers are paid wages in the form of coconut.
6. Name the objects which were used as money before the introduction of coins.
 73

Grain and cattle were used as money before the introduction of coins.
7. Write a short note on the modern forms of money.
Paper notes and coins are the modern forms of money. They are not made of precious
metals like gold or silver. They do not have any use of their own. However, they are
accepted as media of exchange because they are authorized by the government.
8. Name the agency which issue currency notes in India?
The Reserve Bank of India (RBI) issues currency notes on behalf of the government
of India. No other organization or individual is allowed to issue currency. Rupee
cannot be refused in settling transactions in India.
9. What are called demand deposits?
People deposit their surplus money in the banks by opening bank accounts in their
names. Bank accepts deposits and pay interest. People can withdraw their money on
demand. So these deposits are called demand deposits.
10. What is called a ‘cheque’?A cheque is a paper instructing the bank to pay a
specific amount from a person’s account to the person in whose name the cheque has
been made. Cheque can be used to settle payments.
11. Why do we consider demand deposit another form of money?
Cheques can be drawn against demand deposits. These cheques can be used to settle
payment without the use of money. As demand deposits are accepted as a means of
payment, they are considered as another form of money.
12. Explain the main functions of the commercial banks.
Accepting deposits:- Commercial banks accept deposits from the people. It pays
interest to the depositors.
Advancing loans:- Bank gives loans to those people who are in need of money. Bank
collects interest from those who took loans.
13. What is the main source of income of the banks?
Banks collect high interest from those who took loans and pay lower interest to those
who deposited money. The difference between them is banks main source of income.
14. What is credit (loan)?
Credit or loans refers to an agreement in which the lender supplies the borrowers with
money, goods or services in return for the promise of future payment.
15. What is known as collateral security?
 74

Collateral security is an asset which the borrower owns and uses as a guarantee to a
lender until the loan is repaid. If the borrower fails to repay the loan, the bank can sell
the collateral to obtain payment. Land, building, bank deposits, vehicles and livestock
are some of the collateral security.
16. Why do lenders ask for collateral while lending?
Some borrowers may not repay the loan. If a borrower fails to repay the loan, the bank
can sell the collateral to obtain payment. So, bank can avoid taking risk.
17. Given that a large number of people in our country are poor, does it is any way
affect their capacity to borrow?
Yes. It affects the capacity to borrow. Most of the people in India are poor. They do
not have anything to offer as collateral security. So, they don’t get loans from the
bank. They have to depend on money lender to meet their credit needs.
18. What are the differences between formal and informal sources of credit?
Formal sources of credit:-Banks and cooperative societies are the formal source of
credit. They are controlled and supervised by the Reserve Bank of India. They charge
low rate of interest. They do not cheat or exploit the borrowers. They work as per
some rules and regulations.
Informal sources of credit:-Money lender, traders, employers, relatives and friends
form the in formal sources of credit. There is no organization to control or supervise
them. They do not follow any rules and regulations. They collect heavy interest.
19. How does the RBI control commercial banks?
OR
Which institution supervises the functioning of formal sources of credit? How does
it supervise them?
Reserve Bank supervises the formal sources of credit.
RBI ensures that the banks maintain the cash reserve. RBI ensures that the banks give
loan to small farmers, small scale industries and to the other small borrowers. Banks
have to submit information to the RBI on how much they are lending, to whom, at
what interest rate etc…
20. Why should the RBI supervise the functioning of banks?
The RBI should supervise the functioning of banks because of the following reasons:
 75

a. Many banks are not interested to give loans to small scale industries, small and
marginal farmers and the other poorer section of the society. The RBI control is
necessary to ensure that the poor also gets loans from the banks.
b. The RBI control is necessary to ensure that the banks do not collapse.
c. RBI control is necessary to ensure that the banks do not charge very high interest.
21. How do banks mediate between those who have surplus and those who need
money?
The bank receives deposits from those who have surplus money. A part of these
deposits, the banks give as loan to those who are in need of money. Thus the banks
mediate between those who have surplus money and those who need money.
22. Look at a Rs.10 note. What is visible on top? Can you explain this statement?
Reserve bank of India, guaranteed by the central government are the statements
written on the top of Rs. 10 note. These statements indicate that the note is issued by
the RBI on behalf of the central government. It also indicates that the note is
authorized by the central government.
23. Why do we need to expand formal source of credit in India?
OR
Explain the term debt trap. Why is it more rampant in rural areas?
When a borrower is unable to repay the loan amount, we say that he is in debt trap.
Most of the rural areas are not covered by the bank services. Moreover banks are not
interested to give loans to the poorer sections of the society. Small scale industrialists,
small farmers, marginal farmers and other poor people need credit to make
investments and to modernize their activities. They depend on money lenders for
credit and the money lenders exploit them. So for saving the poor people from debt
trap and to develop the rural area, it is necessary to expand the formal sources of
credit in India.
24. What are the reasons, why the banks might not be willing to lend to certain
borrowers?
OR
Why do rural borrowers depend on informal sources of credit?
OR
Most of the poor households depend on informal sources of credit. Explain
Banks do not give loans to certain borrowers because:-
 76

A. They do not have anything to offer as collateral security.

b. Banks do not consider them as credit worthy because their income levels are low.
c. Many rural areas are not covered by banking services. So, the people of these areas
do not get loan.
So, poor people mostly depend on informal sources.
25. What do you mean by terms of credit?
Interest rate of the loan, collateral security, documents needed and the mode of
repayment together constitute the terms of credit.
26. In situations with high risk, credit might create further problems for the
borrowers. Explain.
Suppose a farmer has taken a loan for agricultural purpose. Due to some unfavorable
natural factors the crop fails. The farmer has to take a new loan to repay the old one or
he has to sell a part of his land to repay the loan. In this case the credit has created
problems for the borrower. He falls into debt trap.
27. What is the basic idea behind the SHG’S for the poor? Explain in your own
words.
OR
What is a Self Help Group? How does it work?
Self help groups are the organizations of rural women. The members collect their
savings together and form a fund.
a. Member can take small loans from the group. The SHG can get bank loan to start
some self employment activity.
b. Banks give loans to the members of SHG without any collateral security.
c. Women can discuss a number of social issues such as health and nutrition in this
group.
28. Analyse the role of credit for development.
OR
Cheap and affordable credit is crucial for the country’s development. Explain.
Or
Why should credit at reasonable rates be available to all? Give reasons.
a. Credit is necessary for a farmer to modernize agriculture. A farmer needs credit to
buy agricultural land, HYV seeds, fertilizers etc...
 77

b. Credit is necessary to start industrial units. Huge investment is needed for an

industrial unit. Without credit one will not be able to make the investment.
c. Credit enables the people to set up shops and other commercial activities.
d. To construct houses and other buildings credit is necessary.
f. To buy costly consumer durables and vehicles credit is must.
29. Manau needs loan to set up a small business. On what basis will Manau decide
whether to borrow from the bank or money lender?
If manau has the required documents and collateral security he would apply for a loan
from bank. The bank charges low interest. The banks do not cheat the borrowers.
They follow certain rules and regulations. So bank loan is better for him.
If Manau does not have the required documents and collateral security he will take a
loan from the money lender. The money lenders charge very high interest. They do
not follow any rulers and regulation. They may even cheat the borrowers.
30. Describe the pattern of formal and informal sources of credit in urban areas.
More than 85% of the poor households in urban areas take loans from the informal
sources. Only 10% of the rich households take loans from informal sources. 90% of
the rich households get loans from formal sources.
30. What steps can be taken to encourage rural borrowers to take credit from the
formal sector?
OR
What steps can be taken to solve the problem of rural credit?
OR
Suggest some steps to save the poor people from the exploitation of Moneylenders
(Informal Sources)
(i) Co operative movement should be encouraged. Co operative societies can give
loans without collateral security at low interest.
(ii) Regional Rural Banks should be opened in every village.
(iii) Banks should be asked to set up branches in rural areas and lend to poor people.
(iv) Kisan Credit Cards should be distributed to all farmers.
(v) The villagers should be encouraged to start Self Help Groups.
31. Mention the important functions of the Reserve Bank of India.
(i) RBI issues currency notes: RBI issues currency notes on behalf of the Central
Government. No other agency is allowed to issue currency notes.
 78

(ii) RBI controls the Commercial Banks: Commercial Banks are controlled and
supervise by the RBI.
(iii) Bank of the Government: The Central Government does banking business with
the RBI.
(iv) RBI takes steps to control inflation.
32. “Credit is useful as well as harmful; it depends on the risk involved”. Support
the statement with examples.
(i) Credit is useful if it is taken for productive purposes. The profit earned from the
productive activity can be used to repay the loan. The business will expand.
(ii) Credit is useful if it is taken from formal sources. Rate of interest is low and there
will be no exploitation or cheating.
(iii) Credit is harmful if it is used for unproductive purposes like celebrations or
marriage. The borrower will not be able to repay the loan.
(iv) Credit is harmful if it is taken from non formal sources. The rate of interest is very
low and there is no exploitation.
(v) So, credit should be taken for productive purposes from formal sources.
33. The Rupee is widely accepted as a medium of exchange. Explain.
(i) Rupee is authorized by the Government. It is a promissory note.
(ii) The RBI issues Rupee on behalf of the Central Government.
(iii) As per law, everyone must accept rupee as medium of exchange with in the
country.
(iv) No individual or agency except RBI can issue currency notes.