Chapter 3 – Money and Credit Questions and Answers: NCERT Solutions for Class 10 Social Science – Economics

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

Answer:
In situations with high risks, credit might create further problems for the borrower. This is also known as a debt-trap. Taking credit involves a certain amount of loan that is taken by a borrower from a lender at a high-interest rate. If the borrower fails to pay back the loan amount due to some loss in his job or business, he further falls in the trap of credit. He has to repay the credit along with the interest applied by the lender. This increases the problems for the borrower. In such a situation, he is forced to give up his collateral or asset used as the guarantee, to the lender.
For example, if a farmer takes a loan for crop production and the crop fails, then it becomes nearly impossible for him to repay the loan amount along with the charged interest. To repay the loan the farmer may sell a part of his land making the situation worse than before. Due to being unable to repay the loan and harassed by the lenders, many times farmers commit suicide. Thus, in situations with high risks, if the risks affect a borrower badly, then he ends up losing more than what he would have without taking the loan.

2. How does money solve the problem of double coincidence of wants? Explain with an example of your own.

Answer:
Double coincidence of wants occurs when goods or commodities are exchanged without the use of money. Here, both the individuals who exchange goods are actually in need of those goods. In a barter system where goods are directly exchanged without using money, double coincidence of wants is an essential feature. By serving as a medium of exchanges, money removes the need for double coincidence of wants and the difficulties associated with the barter system. Now, no specific buyer or seller is required for interchanging of products. For example, a farmer has to sell wheat in exchange for cereals then it would be difficult for him to find such a buyer. But money will solve this problem. Now, the farmer can sell his wheat to someone who needs this and with the earned money he can buy cereals for him as well.

3. How do banks mediate between those who have surplus money and those who need money?

Answer:
Banks encourage the people with surplus money to invest their money with them. In return those people are paid a certain rate of interest for the same. Banks hold about 15 per cent of their deposits as cash. This is kept as provision to pay the depositors who might come to withdraw money from the bank on any given day. They use the major portion of the deposits to extend loans to those who need money. In this way banks mediate between those who have surplus money and those who need money. Banks charge a higher interest rate on loans than what they offer on deposits. The difference between the two rates is their main source of income.

4. Look at a 10 rupee note. What is written on top? Can you explain this statement?

Answer:
“Reserve Bank of India” and “Guaranteed by the Government” are written on top a 10 rupee note. In India, currency is issued by the Reserve Bank of India on behalf of the central government. So these two statements signify that the currency is authorized or guaranteed by the Central Government. That is, the Indian law legalizes the use of this 10 rupee note as a medium of payment anywhere in the country.

5. Why do we need to expand formal sources of credit in India?

Answer:
Formal sources of credit are the Government authorised organisations that are eligible to lend money to people. We need to expand these sources of credit in India due to the following reasons:
• the informal sources are not registered and lend money to people at very high-interest rates
• With increased number of formal resources, people will be able to take loans at lesser interest rates and use them to grow their business. This will ultimately help in the development of the country.
• Informal lenders sometimes start harassing the borrower if he is not able to repay the loan at time. However, this is not the case with the formal sources of credit.

6. What is the basic idea behind the SHGs for the poor? Explain in your own words.

Answer:
The basic idea behind the SHGs for the poor is to provide a financial resource for them by organise rural poor, in particular women, into small Self Help Groups (SHGs) and pool (collect) their savings. These groups also provide loans to their members at low interest rate.
Thus, the main objectives of the SHGs is to increase small scale employment opportunities for the rural people. These groups not only 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.

7. What are the reasons why the banks might not be willing to lend to certain borrowers?

Answer:
The banks might not be willing to lend certain borrowers due to the following reasons:
• A few people fail to provide the required set of documents to get a loan.
• There are some people who have not repaid previous loans. Such borrowers are come in the defaulters list. Banks might not be willing to lend them further.
• The banks might not be willing to lend entrepreneurs who are going to invest in the business with high risks.
• The banks might not be willing to lend those people who earn irregular incomes or have no fixed salary because in such cases chances of repayment of the loan are very less.

8. In what ways does the Reserve Bank of India supervise the functions of Banks? Why is this necessary?

Answer:
The Reserve Bank of India supervises the functions of banks in the following ways:
• It monitors the banks in actually maintaining cash balance.
• It ensures that the banks give loans not just to profit-making businesses and traders but also to small cultivators, small scale industries, to small borrowers etc.
• banks have to submit information to the RBI on their credit activities like how much they are lending, to whom, at what interest rate, etc.

9. Analyse the role of credit for development.

Answer:
Credit is one of the major aspects that determine a country’s development. There is a huge demand for loans for various economic activities. Cheap and affordable loans give people an opportunity to develop their business. Credit plays a very crucial role in agricultural activities. People can borrow money and use it to adopt modern farming methods to increase the crop production and grow crops which are more reliable than the traditional methods. By sanctioning loans to developing industries and trade, banks provide them with the necessary aid for improvement. This leads to increased production, employment and profits that ultimately help in the development of the country.

10. 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.

Answer:
Manav will decide whether to borrow from the bank or the money lender on the basis of the following things:
• Comparison between the rate of interest charged by the two sources.
• Availability of the eligible documents required by the bank to approve his loan.
• Mode of repayment of the loan.

11. In India, about 80 per cent of farmers are small farmers, who need credit 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 unfavourable for the small farmer.
(d) Suggest some ways by which small farmers can get cheap credit.

Answer:
(a) Banks ask for proper documents before providing loans. But the small farmers might not be able to provide such documents. In addition to this, there is possibility that the small farmers fail to repay the loan if their crop gets ruined due to some reason. So, banks might not be willing to lend to small farmers as there are high risks.
(b) Apart from the banks, other sources from which the small farmers can borrow include informal sources of credit like local money lenders, agricultural traders, big landlords, cooperatives, SHGs etc.
(c) The terms of credit can be unfavorable for the small farmer which can be explained with the help of the following example:
If a farmer borrows money from the bank and during the harvest season his crops are ruined, then he shall not be able to repay the loan to the bank. He might have to sell a part of his land to repay the amount. In such condition he will further fall into the debt trap.
(d) The small farmers can get cheap credit from the different sources like banks, agricultural cooperatives, and SHGs.

12. 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.

Answer:
(i) Poor
(ii) High
(iii) Reserve Bank of India
(iv) Deposits
(v) Collateral

13. 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.

Answer: (b) Members

(ii) Formal sources of credit does not include
(a) Banks.
(b) Cooperatives.
(c) Employers.

Answer: (c) Employers