CBSE Class 10 Economics Money And Credit Worksheet Set B

Very Short Answer Type Questions

Question : Why are banks unwilling to lend loans to small farmers?
Answer : Banks provide loans after collateral and documentation securities, which generally the small farmers fail to comply with. Therefore, banks are unwilling to give loans to small farmers.

Question : Who supervises the functioning of formal sources of loans?
Answer : Reserve Bank of India

Question : Prove with an argument that there is a great need to expand formal sources of credit in rural India.
Answer : There is a great need to expand the formal sources of credit in rural India because:
• There is no organisation to supervise credit activities of the informal sector. It could lead to increasing debt among the borrowers.
• The rate of interest is very high in informal sector.

Question : What are the two forms of modern currency?
Answer : Paper notes and Coins

Question : What is a debt-trap?
Answer : A debt-trap is a situation when it becomes impossible to repay the loan and the borrower adds on a new debt to pay the existing debt.

Question : Compare formal sector loans with informal sector loans regarding interest only.
Answer : 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.

Question : What is the meaning of barter system?
Answer : A system where goods are directly exchanged without the use of money is called barter system.

Question : How do the deposits with the banks become their source of income?
Answer : Banks use a major portion of deposits to extend loans. They charge a higher rate of interest on loans than what they offer on deposits. The difference between what is charged from borrowers and what is paid to the depositors is the main source of income for the banks.

Question : Why are most of the poor households deprived from the formal sector of loans?
Answer : Most of the poor households are deprived from the formal sector of loans because they do not have the collateral to keep with the banks.

Short Answer Type Questions 

Question : Why are the deposits in the banks called ‘demand deposits’? What are the benefits of deposits with the banks?
Answer : People deposit extra cash with the bank by opening a bank account in their name. Banks accept the deposits and also pay an amount as interest on the deposits. In this way people’s money is safe with the banks and it earns an amount of interest. People also have the provision to withdraw the money as and when they require. Since the deposits in the bank accounts can be withdrawn on demand, these deposits are called demand deposits.

Question : What are the difficulties from which the barter system of exchange suffers?
Answer :  (i) Lack of double coincidence of wants.
(ii) Valuations of all the goods cannot be done easily.
(iii) Certain products cannot be divided.

Question : What does credit mean? What are the terms of the credit?
Answer :  Credit refers to an agreement in which lender supplies the borrowers with money, goods and services in return for the promise of future payments.
Terms of credit includes the following:
(i) Interest rate
(ii) Collateral
(iii) Documentation requirement
(iv) Mode of payment.
These terms of credit vary substantially from one credit arrangement to another. They may vary depending on the nature of lender and borrower. Every loan agreement specifies an interest rate which the borrower has to pay to the lender along with the repayment of the principal. In addition to this lenders maydemand collateral (security) against the loans.

Question : Why is the rupee widely accepted as a medium of exchange?
Answer :  (i) In India, the Reserve Bank of India issues currency notes on behalf of the central government.
(ii) As per Indian law, no other individual or organisation is allowed to issue currency.
(iii) Moreover, the law legalises the use of rupee as a medium of payment that cannot be refused in settling transaction in India.
(iv) No individual in India can legally refuse a payment made in rupees. Hence, the rupee is widely accepted as a medium of exchange. 

Points to remember for Understanding Economic Development Chapter 03 Money and Credit

Money as a Medium of Exchange
Money is used for several transactions. It is considered as a means of exchange, as it acts as intermediate in the exchange process.

Barter System of Exchange
Before the use of money, people followed barter system of exchange. In this system, goods are directly exchanged (without use of money) between two or more people who agree to exchange each other’s goods.
For example, farmer exchanging wheat for shoes and vice versa.
In this case, the farmer and shoes manufacturer should be in need of each other’s goods. This is called double coincidence of wants. The major drawback of this system was the lack of double coincidence of wants, as without it, exchange was not possible. The use of money eliminated the need of double coincidence of wants. Money was accepted as a common medium of exchange.

Modern Forms of Money
Modern forms of money include currency (paper notes and coins). Before the introduction of coins, a variety of objects like grains and cattle were used as money. Further, the use of metallic coins of gold, silver, copper, etc started.

Currency
It is a generally accepted form of money, that includes coins and paper notes. It is authorised by the government and circulated within an economy. The modern currency has no use of its own except as a medium of exchange.
In India, Reserve Bank of India can only issue currency notes on behalf of the Government of India. The rupee is widely accepted as a medium of exchange as it is legalised by law.

Deposits with Banks
It means the amount that people keep in their bank accounts. People deposit their extra money in banks by opening a bank account in their name. The money in bank account are deposits with banks. Banks accept the deposits and also pay an interest on the deposits. People can also withdraw the money when they require. Deposit with banks are called Demand Deposits.

Cheque Facility
Cheque is basically a paper instructing the bank to pay a specific amount from the person’s account to that person in whose name the cheque has been issued. Payments can be made with the use of cheque instead of cash.

Modern Banking System
The modern forms of money i.e. currency and deposits are closely linked to the working of the modern banking system.

Loan Activities of Banks
Banks accept deposits of the people. In this way, they collect large amount as deposits. They keep only a small portion of deposits (in India, it is 15%) as cash.
This is kept for those depositors who wish to withdraw money from their accounts. Rest of the deposits are given as loans by the banks.
When banks give loans, they charge higher rate of interest from the people who have taken loans. This becomes the income of the banks. In this way, banks act as mediator between those who have surplus funds (the depositors) and those who are in need of funds (the borrowers).

Credit
Credit or loan refers to an agreement in which the lender supplies money, goods or services to borrower with the promise of future payment. A large number of transactions in our day-to-day activities involve credit in some form or the other.

Two Different Credit Situations
(i) In the first situation, credit is used to meet the production expenses. When the production is complete then it increases earnings. Here, credit plays a positive role.
For example, Salim a manufacturer takes credit for his business. During the festival season, he receive large orders from traders. To complete production on time, he ask the raw material suppliers to supply material on credit.
He also obtains loan in cash from the trader as some of the advance payment for the goods to be supplied.
At the end of the manufacturing cycle, Salim is able to deliver the order, make a good profit and repay the money that he had borrowed. This helps to increase earnings and therefore, the person is better off than before.
(ii) In the second situation, credit pushes the borrower into a situation from which recovery is very difficult and painful.
For example, Swapna takes loan from moneylender to grow groundnut, hoping that her harvest would help repay the loan. Midway through the season the crop is hit by pests and the crop fails. She is unable to repay the moneylender and the debt grows over the year into a large amount.
Next year, Swapna takes a fresh loan for cultivation. It is a normal crop this year but the earnings are not enough to cover the old loan. She is caught in debt. She has to sell a part of the land to pay off the debt.
In this situation, credit pushes Swapna into a debt-trap. Her condition becomes worse than before.

Interpretation of Both Situations
• From both the examples, we see that in one situation credit helps to increase earnings and therefore, the condition of a person is better than before.
• In other situation, because of the crop failure credit pushes the person into a debt-trap. Whether credit would be useful or not, it depends on the risks in the situation and whether there is some support, in case of loss.

Terms of Credit
It is a set of conditions under which a loan is given. It may include method of payment, rate of interest, duration of credit and other related conditions like, collateral, documentation requirement6 and the mode of repayment.
The terms of credit may vary according to the situation of the lender and the borrower.

Collateral
It is a security against loans. It is an asset that the borrower owns and uses this as a guarantee to a lender until the loan is repaid. If the borrower fails to repay the loan, the lender has the right to sell the asset or collateral to obtain payment.
Some examples of collateral security used for borrowing are land titles, deposits with banks, livestock, etc.

Variety of Credit Arrangements
There may be different credit arrangements for different categories of borrowers. These are
• Loan from Moneylenders Small farmers borrow money from the village moneylender at high rate of interest. Due to high interest rate they fell in debt-trap.
• Loan from Traders Farmers get loans from agricultural traders at a lower rate of interest. But the traders also get the promise of the farmers to sell their crops to him only. In this way, trader ensures that the money is repaid besides making profit. He buys crop from farmers at low price and sell it later, when price is high.
• Loan from Banks Some farmers take loan for cultivation from banks, at very low interest rate and at easy repayment terms.
Banks also provide other facilities to such borrowers.
• Loan from Employers Landless agricultural labourers and workers depend on their employers for loan. The landowner may charge interest rate upto 5% per month. The workers work for landowners in order to repay the loan.
• Loan from Cooperatives This is the major source of cheap credit in rural areas. Loans to member of cooperative societies can be provided for the purchase of agricultural implements, cultivation and agricultural trade, fisheries, construction of houses and other expenses.

Credit Sources in India
The two categories of sources of credit are formal sector credit or loans and informal sector credit or loans.
The formal sector comprises banks and cooperative societies. The informal sector may consist of moneylenders, friends and relatives, traders, landowners, large farmers, etc.

Features of Formal Sector Credit
• It provides loans comparatively at a lower rate of interest and collateral security is required to obtain loans.
• This sector is mainly supervised by the RBI (Reserve Bank of India).
• It includes banks and cooperatives.

Role of RBI in Formal Sector
RBI has major role in providing formal sector credit. Its role is
• The RBI (Reserve Bank of India) ensures that the banks give loans not just to profit-making businesses and traders, but also to small cultivators, small scale industries, small borrowers, etc.
• Periodically, banks have to submit information to the RBI on how much they are lending, to whom and at what interest rate they are lending to borrowers, etc.
• The banks maintain a minimum cash balance out of the deposits they receive. The RBI monitors the banks in actually maintaining cash balance.

Features of Informal Sector Credit
• This sector charges higher interest rates on the loans that are given as there is no organisation to supervise this sector.
• This sector could lead to increasing debt as the borrower finds difficulty in paying back.
• People who might wish to start an enterprise by borrowing from the informal sector may not do so because of the high cost of borrowing. However, still poor households in urban and rural areas depend upon informal sources for their borrowing needs as they don’t require any collateral.

Self Help Groups (SHGs) for the Poor
Self Help Group is a group of people usually belonging to one neighbourhood having same social and economic backgrounds. They meet and save money regularly as per their ability.
Members of the group (usually 15-20) can take small loans from the group itself to meet their needs. The group charges interest less than moneylenders on these loans.
After one or two years, if the group is regular in savings, it becomes eligible for availing loan from the bank. Loan is sanctioned in the name of group and is meant to create self-employment opportunities by providing money to buy raw materials, seeds, assets like sewing machines, handlooms, cattle, etc.

SHGs : A Helping Hand for Women
SHGs are the building blocks of organisation of the rural poor. The SHGs help women to become financially self-reliant and regular meetings of the group provide a platform for women to discuss and act on a variety of social issues such as health, nutrition, domestic violence, etc.

Grameen Bank of Bangladesh
Professor Muhammad Yunus, the founder of Grameen Bank and recipient of 2006 Nobel Prize for Peace, started the bank as a small project in the 1970s. He provided small credit on reasonable terms and conditions to millions of poor people with different occupations.