ECONOMICS CHAPTER-3 MONEY AND CREDIT (READER QUESTION AND ANSWERS)

Q1) In situations with high risks, credit might create further problems for the borrower. Explain
1) While credit may help the borrower in initiating his/her business or work, at times in situation of high
risk, it may create further problems for the borrower.
2) When the borrower is not able to pay the interest on the loan he/she has taken, the interest keeps on
mounting which eventually becomes a huge sum.
3) This pushes the borrower into a debt trap. The borrower, in such a case, has to sell a part of his/her
property to repay the loan. So he might face painful situations from which recovery may become
impossible.

Q2)How does money solve the problem of double coincidence of wants? Explain with example of your
own.
1) Double coincidence of wants is an important feature of the barter system. In barter system, a seller needs
to find a buyer who can purchase a commodity and vice versa. This condition is extremely difficult to
fulfill.
2) The introduction of money resulted in the end of the barter system where goods were exchanged
according to the needs. Now, money acts as an intermediate in the exchange process, and thus, it is
known as a medium of exchange. Anyone can exchange their goods for money and buy commodities
that are required by them.
3) For example, a fruit seller wants to sell his fruits in order to buy wheat. In the absence of money, he will
have to look for some person who wants to sell wheat and buy fruits. This is not easy and always
possible. However, in case of availability of money as a medium of exchange, the fruit seller just has to
find a buyer for her fruits. Once fruits are exchanged for money, she can purchase wheat from the
market.
Q3)How do banks mediate between those who have surplus money and those who need money?

Refer the notes (Question No.-8)

Q4) Look at a 10 rupee note. What is written on top? Can you explain this statement?
1) ’Reserve Bank of India’ along with a statement, “guaranteed by the Central Government” is written
on the top of a ten rupee note.
2) ‘I promise to pay the bearer a sum of ten rupees’. (Signed by the Governor of RBI)
3) This statement means that the ten rupee note has been issued by the RBI with a promise by the
Central Government and the Governor of RBI to pay the bearer a sum of ten rupees.

Q5)Why do we need to expand formal sources of credit in India?

1) We need to expand the formal source of credit in India, as in rural areas the informal source of credit
such as money lenders charge exorbitant rate of interest from the people. Because of high cost of
borrowing poor households are left with very less income.
2) In such a situation, a borrower is usually caught in a debt trap. Sometimes the poor borrowers are forced
to sell off their assets. They are prone to exploitation.
 3) The formal sources of credit provide loans to people at a cheaper rate of interests which benefits the
farmers and small self-employed people. These are monitored by RBI, so borrowers are not prone to
exploitation.

Q6) What is the basic idea behind the SHGs for the poor? Explain in your own words.
1) The idea of Self Help Group has come into existence in order to reduce dependency on informal sector
of poor households. The formal sources of credit is also not accessible to them because of various
reasons.
2) A SHG (Self-help Group) is a group of 15-20 members based in rural areas who pool their savings
together to provide loans to their own members. The loan is provided with much lower interest rates
than charged by the local money lenders.
3) If the SHG’s become regular in their savings, they are provided bank loans. This helps in creating
opportunities for self-employment for the members. The members can get loans from the group without
having to arrange any collateral.
4) Therefore, the basic idea of SHG is to provide easy loans at low rate of interest to the members, and
thus, making them financially self-reliant (especially women).

Q7) What are the reasons why the banks might not be willing to lend to certain borrowers?
The banks might not be willing to lend certain borrowers due to the following reasons:
(a) Banks require proper documents and collateral as security against loans. Some
persons fail to meet these requirements.
(b) The borrowers who have not repaid previous loans, the banks might not be willing to
lend them further.
(c) The banks need important data from the borrower like his source of income, address
proof, what the borrower would intend to do with the loans etc. If the bank is not satisfied
with all these issues, the bank might refuse to give credit to the borrowers.

Q8) In what ways does the Reserve Bank of India supervise the functioning of banks? Why is this
necessary?
The Reserve Bank of India supervises the functioning of banks in the following ways:
1. The RBI checks if the banks are maintaining the required amount of cash deposits.
2. To see to it that the banks are also providing loans to small farmers, self-employed people and
not just to big business houses.
3. RBI seeks information from the banks on the total amount they lend during the year and the
rate of interest that is charged on to the customers.
Such a supervision and monitoring is necessary to ensure that the banks maintain required liquidity and follows
the right procedures of borrowing and lending the money. The inability of the banks to work in accordance with
the laid guidelines may result in the loss of money of small and medium investors and may result in financial
instability of the country.

Q9) Analyse the role of credit for development.

1) Credit plays an important role in the development of an economy. India is primarily an agricultural
country. The timely advancing of credit to the farmers at low rate of interest helps the farmers in
increasing their production.
 2) In urban areas, the provision of credit to small business units can help them to prosper. Banks also
provide loans to various builders for their development projects.
3) However, it has to be kept in mind that credit should be advanced at cheap rates with fair practices and
principles. Credit at extremely high rate of interest may worsen the condition of the borrowers by
pushing them into debt trap.

Q10) Manav needs a loan to set up a small business. On what basis will Manav decide whether to
borrow from the bank or the moneylender? Discuss.
1) He will compare the interest rates of two different lending agencies – the formal and the informal
sectors.
2) If Manav has collateral for the bank, then he will prefer to take a loan from the bank. However, if he
lacks collateral then he may have to borrow money from the money lenders.
3) If Manav wants credit at cheap rates, he will consider borrowing the amount from the bank. However,
if he lives in a village where there are no credit societies or rural banks, he might take loan from the
moneylender.

Q11) In India about 80 per cent of farmers are small farmers, who need for cultivation.
(a) Why might banks be unwilling to lend to small farmers?

(b) What are the other sources from which the small farmers can borrow?

(c) Explain with an example how the terms of credit can be unfavorable for the small farmer.
(d) Suggest some ways by which small farmers can get cheap credit.

(a) Banks might be unwilling to lend money to the farmers in case of absence of collateral with the farmers.
(b) Other sources of credit from where small farmers can borrow are money lenders, friends, relatives,
neighbours and traders.
(c) When a farmer is charged with a high rate of interest and she/he will not be able to repay the loan. Sometimes,
because of crop failure or during famine, floods or bad harvest, she/he may be forced to sell a part of her/his
land. Under such circumstances, terms of credit may become unfavourable for her/him.
(d) By becoming a part of Self-help Group and by taking a loan from the Cooperative societies, a farmer can get
cheap credit. Members of such cooperatives pool their resources together and use these funds to give loans to
the members. The interest charged by such groups is quite reasonable and is much lower than charged by the
money lenders.

Q13)Fill in the blanks:

(i) Majority of the credit needs of the __________households are met from informal sources.

(ii) __________costs of borrowing increase the debt-burden.

(iii) __________issues currency notes on behalf of the Central Government.

(iv) Banks charge a higher interest rate on loans than what they offer on __________.
(v) __________is an asset that the borrower owns and uses as a guarantee until the loan is repaid to the lender.

(i) Majority of the credit needs of the poor households are met from informal sources.

(ii) High costs of borrowing increase the debt-burden.

(iii) Reserve Bank of India issues currency notes on behalf of the Central Government.

(iv) Banks charge a higher interest rate on loans than what they offer on deposits.

(v) Collateral is an asset that the borrower owns and uses as a guarantee until the loan is repaid to the lender.

Q13)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.

Solution 13
(i) Members

(ii) Employers