CBSE Class 10 Economics Money And Credit Worksheet Set A

MONEY AS A MEDIUM OF EXCHANGE

A person holding money can easily exchange it for any commodity or service that he or she might want. Thus, everyone prefers to receive payments in money and then exchange the money for things that they want. Let us take the case of a shoe manufacturer. He wants to sell shoes in the market and buy wheat. The shoe manufacturer will first exchange shoes that he has produced for money, and then exchange the money for wheat. In the earlier scenario of barter system, the shoe seller would have to look for a wheat seller who also wants to buy shoes.

Barter System: The barter system was used before the advent of money. People used to exchange one thing for another in this system.
Double Coincidence of wants: The double coincidence of wants is the major drawback of the barter system. It can be very difficult to find people who can fulfill this condition. What one person desires to sell is exactly what the other wishes to buy. In a barter system where goods are directly exchanged without the use of money, double coincidence of wants is an essential feature. In contrast, in an economy where money is in use, money by providing the crucial intermediate step eliminates the need for double coincidence of wants. It is no longer necessary for the shoe manufacturer to look for a farmer who will buy his shoes and at the same time sell him wheat. Since, money acts as an intermediate in the exchange process, it is called a medium of exchange.

MONEY

• Money is a means by which we can get something in exchange. Initially, coins came into use. The coins were initially made of precious metals; like gold and silver. When the precious metals became too precious, ordinary metals began to be used for making coins. Paper money or currency notes gradually took place of coins; although coins of smaller denominations are still in use.
• The currency notes and coins are issued by the government or an authorized body. In India, the RBI (Reserve Bank of India) issues currency notes on behalf of the Union Government. On the Indian currency note, you can find a statement which promises to pay the bearer the amount which is mentioned on the currency note.
• As per Indian law, no other individual or organization is allowed to issue currency. Moreover, the law legalizes the use of rupee as a medium of payment that cannot be refused in settling transactions in India. No individual in India can legally refuse a payment made in rupees. Hence, the rupee is widely accepted as a medium of exchange.

Advantages of Money

Removes the coincidence of wants :
(a) Takes less storage space and is easier to carry.
(b) Liquidity of currency is easier
(c) Now-a-days; many instruments are available for money transaction so, one need not to carry physical currency.

MODERN FORMS OF MONEY

• Deposits with Banks: Generally we need only some currency for our daily needs. Rest of the amount is usually kept as deposit in banks. Money which is kept in a bank is safe and it even earns an interest. One can withdraw money from his account as and when required. Since, deposit in the bank account can be withdrawn on demand, these deposits are called demand deposits.
• One can use a cheque; instead of cash to settle payments. Moreover, one can also buy a demand draft from a bank to make payments.
• Credit: Banks keep a small proportion of their deposits as cash with themselves. This is usually 15% of their deposits as cash. This amount is kept as provision to pay the depositors who may come to withdraw the money on any day. This amount is enough because only a small fraction of people come to withdraw money on a given day.
• The rest of the amount is used by the banks to give money on credit to people who need the credit. A bank charges interest on the loan. The interest rate charged by a bank on loans is higher than the interest rate given by it on deposits. Thus, interest is the main source of income for banks.
• Credit/Debit Cards and Cellphone applications: Now-a-days, credit/debit cards are in vogue. A debit card allows you to make payments from the amount which is lying in your bank account. A credit card, on the other hand, provides money on credit. Payment through credit/debit card is done electronically and this removes the need of carrying cash.
• These days payments can be made and received through cell phone applications.
• This makes the transaction very convenient without carrying cash.

LOAN ACTIVITIES OF BANKS

• People often need to borrow money for various purposes. Many businessmen need to borrow to buy raw materials and machineries. Many farmers need to borrow to buy seeds, fertilisers, farm equipments, etc. People usually buy vehicles and houses by borrowing from banks. Thus, credit plays an important role in the economy.
• Every loan agreement specifies terms and conditions; regarding the rate of interest and terms of payment. In most of the cases, the banks fix an EMI (Equated Monthly Installment) for repayment of loan.

TWO DIFFERENT CREDIT SITUATIONS

A large number of transactions in our day-today activities involve credit or loan in some form. Loan refers to an agreement in which the lender gives the borrower money, goods or services in return for the promise of future payment.

Credit plays a vital and positive role business whether small or large. In business the loan is usually needed to finance the working capital. That is is to buy raw material and to pay for recurring expenses. The loan is usually paid after the finished goods are sold and payment are received.
In rural areas, the main demand for credit is for crop production. It involves considerable costs on seeds, fertilizers, pesticides, water, electricity, repair of equipment, etc. There is a minimum three to four months between the time when the farmers buy these inputs and when they sell the crop. Farmers usually take crop loans at the beginning of the season and repay the loan after harvest. Repayment of the loan is crucially dependent on the income from farming.

TERMS OF CREDIT

• Collateral: An asset which is owned by the borrower and is used as a guarantee to a lender until the loan is repaid is called the collateral. Land, house, vehicle, livestocks, deposits with banks, insurance policy, gold, etc., are examples of assets that can be kept as collateral. If the borrower fails to repay the loan, the lender reserves the right to sell the collateral to obtain payment.
• Documentation: The transaction between the lender and the borrower are put on record by documenting it. It includes rate of interest, tenure, collateral and mode of repayment. The terms of credit vary from one loan agreement to another and also on the nature of the lender and the borrower.

FORMAL SECTOR CREDIT IN INDIA

• The formal Sector comprises of banks and cooperative societies. The Reserve Bank of India supervises the functioning of formal sources of loans. For instance, we have seen that the banks maintain a minimum cash balance out of the deposits they receive. The RBI monitors that the banks actually maintain the cash balance.
• Similarly, the RBI sees 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. Periodically, banks have to submit information to the RBI on how much they are lending, to whom, at what terms and conditions.

Informal Sector

• The informal sector consists of money lenders, traders, employers, friends, relatives, merchants and landlords. There is no organization which supervises the credit activities of lenders in the informal sector.
• They can lend at whatever interest rate and terms they wish.
• The informal lenders usually charge a very high rate of interest. A higher cost of borrowing is often detrimental to the borrower. It usually results in a debt trap for the borrower. The borrower is seldom able to escape the never ending cycle of loan repayment.
• Many people are too poor to qualify the requirements of credit-worthiness of banks and cooperatives. There are many others who may not have enough documents; like residential certificate or income certificate. Such people are usually at the mercy of informal lenders.
• Most loans from informal lenders carry a very high interest rate and have other stringent conditions. They do little to increase the income of the borrowers.
• Thus, it is necessary that banks and co-operatives increase their lending particularly in the rural areas, so that the dependence on informal sources of credit reduces.
• While formal sector loans need to expand, it is also necessary that everyone receives these loans. At present, it is the richer households who receive formal credit whereas the poor have to depend on the informal sources. ff It is important that the process and the requirements for availing formal credit should be made accommodative so that the poor can benefit from the cheaper loans.

SELF HELP GROUPS FOR THE POOR

• Self Help Groups (SHGs) are recent phenomena. A SHG is comprised of small number of people; like 15 – 20 members. The members pool their savings. The collection is then utilised to lend small amounts of money which may be required by any of the members. The group charges interest on the loan. The arrangement of loans through Self Help Groups is also known as microfinance because the small amount of loan is involved.
• It was the Grameen Bank of Bangladesh which began experimenting with microfinance. The founder of Grameen Bank, Mohammad Yunus was conferred with Nobel Prize in 2006 for his efforts at improving the lot of the poor.
• SHGs have helped immensely in reducing the influence of informal lenders in rural areas. Many big corporate houses are also promoting SHGs at many places in India.

Features

1. Comprising 15-20 members
2. Neighbors together save small amounts regularly
3. Saving may vary from member to member
4. Members can take small loans at low interest rates
5. Collaterals are not required
6. Repayment default is seriously followed by the members

Objectives

1. To create a facility that will cater to the credit needs of the very poor section
2. Targets small and marginal farmers and rural artisans
3. It inculcates saving habit in the rural poor people
4. To enhance participation
5. To improve capabilities of women
6. To enhance the socio-economic base of villages
7. To encourage entrepreneurship in villages

Benefits

1. Develops the habit of initiating action
2. Improves living conditions
3. Makes the members responsible for their actions
4. Helps in capacity building
5. Develops self confidence amongst members
6. Promotes trust and mutual help
7. Encourages resource pooling
8. Leads to financial inclusion

“Microfinance recognizes that poor people are remarkable reservoirs of energy and knowledge. While the lack of financial services is not just a sign of poverty, today it is looked as an untapped opportunity to create markets, bring people in from the margins and give them the tools to help themselves” Kofi Annan (Ex. Sec General of UN) “The poor stay poor, not because they are lazy but because they have no access to capital” -Milton Friedman

Question : What do people belonging to poor households lack?
(a) Proper document
(b) Collateral
(c) Certificate of earning
(d) All of the above.
Answer : D  

Fill In The Blank

True/False

Question : What do people do with extra money?
Answer :  They deposit it with the banks by opening a bank account in their name.

Question : Why do we consider demand deposits as money?
Answer :  Demand deposit constitute money in modern economy as they are accepted widely as a means of payment along with currency. 

Question : What does higher cost of borrowing means?
Answer :  This means a large part of the earnings of the borrowers is used to repay the loan. Hence, borrowers have less income left for themselves.

Question : When is crucial for the country’s development?
Answer :  Cheap and affordable credit is crucial for the country is development.

Question : How do the SHGs help borrowers?
Answer :  The SHGs help borrowers overcome the problem of lack of collateral. 

Question : What is a cheque?
Answer : 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 issued.