CBSE Class 10 Social Science Money and Credit Important Questions

SUMMARY

• In a barter system, goods are exchanged (without the use of money) between two or more persons.
• Barter system can also be termed as ‘double coincidence of wants’.
• Money is a medium of exchange in transactions. Modern form of money includes currency (paper notes and coins).
• In India, the Reserve Bank of India (RBI) issues currency notes on behalf of the government.
• People deposit their extra money in banks by opening a bank account in their name.
• Banks pay an interest on the deposits.
• A cheque is a paper instructing the bank to pay a specific amount from a person’s account to a person to whom the cheque is addressed.
• Credit or loan refers to an agreement in which the lender supplies to borrower money, goods and services with the promise of future payment.
• Loan activities of banks: Banks pay a low interest rate on the deposits made in the bank. Banks give loans to borrowers and take a high interest rate on it.
• Terms of credit is a set of conditions under which a loan is given. It may include method of payment, rate of interest, duration of credit, etc.
• Collateral is an asset that the borrower owns, such as land livestock, a vehicle, etc. that the borrower uses as a guarantee to the lender until the loan is repaid.
• In a village there may be different credit arrangements for different categories of borrowers, such as loan from moneylenders, traders, banks and employers.
• Credit sources in India are both formal and informal sectors.
• The formal sector of credit includes banks and cooperate societies.
• The formal sector provides loans at a comparatively lower rate and collateral security is required to obtain these loans.
• The RBI has major role in providing formal sector credit.
• The informal sector of credit includes moneylenders, friends, traders, etc.
• The informal sector charges higher interest rates on its loan and collateral security is not required to obtain loans from the informal sector.
• Self-help Groups (SHGs) for the poor is a group of people usually belonging to one neighbourhood having some social and economic backgrounds. They meet and save money regularly as per their ability.

VERY SHORT ANSWER TYPE QUESTIONS

Question. How is money beneficial in transactions?
Answer : Money is beneficial in transactions as we can directly settle the transaction with use of it.

Question. How do the deposits with the banks become their source of income?
Answer : With the deposits in the bank, the bank use it to extend loan to the borrowers with the high rate of interest. Bank pays less rate of interest to the depositors. The difference is the source of income of the banks.

Question. Why can one not refuse a payment made in rupees in India? 
Answer : One cannot refuse a payment made in rupees in India because it is authorized by the government of the country.

Question. What is collateral?
Answer : It is an asset that the borrower owns and given to the lender as a guarantee that he will repay the loan. If the borrower is unable to repay the loan then the lender has the right to sell it and get the money back.

Question. How does money act as a medium of exchange?
Answer : Money acts as an intermediate in the exchange process and eliminates the need for double coincidence of wants. As money acts as intermediate, it is also called medium of exchange.

Question. Define credit.
Answer : Credit is an agreement between the lender and the borrower in which the borrower promises to pay the lender in the future.

Question. Which are the two major sources of formal loan for rural households.
Answer : The two major sources of formal loan for rural households are Banks and Cooperatives.

Question. What is a cheque?
Answer: A cheque is a paper instructing the bank to pay a specific amount from the person’s account to the person in whose name the cheque has been issued.

Question. Which are the two major formal sources of credit for rural households?
Answer: Banks and Cooperatives

Question. What is the main reason for taking loans by farmers?
Answer: The main reason for taking loans for farmers is for crop production.

Question. What is a debt trap?
Answer: A debt trap is a situation in which the debt is difficult or impossible to pay.

Question. Why are bank deposits called as demand deposits?
Answer: Since the deposits in the bank accounts can be withdrawn on demand, these deposits are called demand deposits.

Question. Mention two disadvantages of the barter system.
Answer: Lack of a common unit of value and lack of standard for deferred payments.

Question. Are gold coins a modern form of money?
Answer: No, gold coins are not a modern form of money.

Question. What is the main informal sector in rural areas for borrowing money?
Answer: The main informal sector in rural areas for borrowing money is moneylender.

Question. Which organisation has the sole right to print currency notes in India?
Answer: The Reserve Bank of India

Question. What is meant by double coincidence of wants?
Answer: If both the parties agree to buy and sell each other’s commodities respectively, then it is known as double coincidence of wants.

Question. Which is more expensive–formal or informal sectors of credit?
Answer: The informal sectors of credit are more expensive as there are no formal guidelines for loan repayment, rate of interest, etc.

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 formal sources of credit in rural India so that the people can be protected from the clutch ‘ of the moneylenders and improve their economic condition.

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

Question. Why is the supervision of the functioning of formal sources of loans necessary?
Answer : It is necessary to supervise the functioning of formal sources of loans because the banks have to maintain a minimum cash balance out of the deposits they receive. They should also provide loans to small cultivators, mall scale industries etc.

Question. Define money.
Answer: Money is anything which has common acceptability as a means of exchange, a measure and a store of value.

Question. Why is money called ‘a medium of exchange’?
OR
How does money act as a medium of exchange?
Answer : Money acts as an intermediary in the process of exchange, thus it is called a medium of exchange.

Question. Why are most of the poor households deprived from the formal sector of loans? 
Answer : As the banks are not available everywhere in the rural areas and also due to its documentation process, most of the poor households are deprived from the formal sector of loans.

Question. How does money eliminate the need for double coincidence of wants?
Answer : Money acts as an intermediate in the exchange process and thus eliminates the need for double coincidence of wants.

Question. What is the meaning of barter system?
Answer : In the earlier times, before the introduction of money, goods and services were exchanged with goods and services. This system of exchange was termed as barter system.

Question. What is meant by double coincidence of wants?
Answer : An essential feature of barter system is double coincidence of wants in which, both the parties (seller and the buyer) have to agree to buy and sell each other’s commodities.

Question. What is a cheque? 
Answer : A cheque is a paper that instructs the bank to pay a specific amount from the holder’s account to the person in whose name the cheque has been issued.

Question. Give any two examples of informal sector of credit.
Answer : The two examples of informal sector of credit are moneylenders and friends.

Question. Highlight the inherent problem, in double coincidence of wants.
Answer : The inherent problem in double coincidence of wants is both the parties (seller and the buyer) have to agree to buy and sell each other’s commodities.

Question. How does the use of money make it easier to exchange things? Give an example.
Answer : In barter system, if a shoe manufacturer wants to sell shoes and buy wheat, first he has to look for a wheatgrowing farmer who wants to buy shoes and needs to sell wheat. Money can make it easier to exchange the things. The shoe manufacturer can sell the shoes for money and then with that money he can bed to buy wheat.

Question. Who supervises the functioning of the formal sources of loans?
Answer : The functioning of the formal sources of loans is supervised by the Reserve Bank of India.

Question. Compare formal sector loans with informal sector loans regarding interest only. 
Answer : The rate of interest charged by the formal sector is low whereas it is high in case of the informal sector.

Question. Why is the supervision of the functioning of the formal sources of loans necessary?
Answer : The supervision of the functioning of the formal sources of loans necessary to protect the borrowers from any kind of harassment as done in the informal sector.

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

Question. What  is double coincidence of want?
Answer : When both parties  agree to sell and buy each   others  commodities. It is known as double coincidence of wants. What a person desires to sell is exactly what the other wishes to buy.

Question. What is barter system?
Answer : In  barter system   goods are directly exchanged without the use of money.

Question. Why  money is called medium of exchange?
Answer : Money  acts as an intermediate in the exchange process. 

Question. What is currency?
Answer : Modern forms of money include currency — paper notes and coins.

Question. Who issues currency on behalf of central government?
Answer : In India, the Reserve Bank of India issues currency notes on behalf of the central government.

Question. What do you understand by demand deposits?
Answer : Since the deposits in the bank accounts can be withdrawn on demand, these deposits are called Demand  deposits

Question. What is the main source of income of the bank?
Answer : The difference between what is charged from borrowers and what is paid to depositors is their main source of income.

Question. What is credit?
Answer : Credit (loan) refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payment.

Question. What is collateral?
Answer : Collateral is an asset that the borrower owns (such as land, building, vehicle, livestocks, deposits with banks) and uses this as a guarantee to a lender until the loan is repaid.

Question. What is  term of credit?
Answer :  Interest rate, collateral and documentation requirement, and the mode of repayment together comprise   terms of credit.

Question. What Is cheque?
Answer : Cheque is a paper instructing the bank to pay a specific amount from the person’s account to the person in whose name the cheque has been made.

Question. What  is money?
Answer : Money is anything which has common acceptability as a means of exchange.

SHORT ANSWER TYPE QUESTIONS

Question. When does credit push the borrower into a debt-trap? Explain with the help of an example.
Answer :
In situation with high risks, credit might create problems and pushes the borrower into a debt-trap.
He is much worse off than before. For example, crop production involves high costs on inputs such as fertilizers, pesticides, water etc. Farmers generally take loans at the beginning of the season and repay the loan after harvest. But the failure of the crop makes loan repayment impossible. They have to sell part of the land to repay the loan or a fresh loan may be required to repay the previous loan, and the borrower may find himself caught in a vicious circle and recovery from such a situation is very painful.

Question. What do you understand by the ‘terms of credit’?
Answer: Interest rate, collateral and documentation requirement, and the mode of repayment together comprise what is called the terms of credit.

Question. Why is money called the medium of exchange?
Answer: Money acts an intermediary in the exchange process and so it is called the medium of exchange.

Question. How does poverty affect a person’s capacity to borrow?
Answer: Credit is always given after properly assessing the repayment capacity of the borrower. Since poor
people do not have repayment capacity they are usually unable to get loan, especially from the formal sector. They get some loan from the informal sector but they often fall in debt-trap because of the high interest rate.

Question. Why should you deposit your surplus money in banks?
Answer: You should deposit your surplus money in banks as money is safe with the bank and also earns an amount in the form of interest when kept in a bank.

Question. What is demonetization? Explain with an example.
Answer: The withdrawal of notes, coins or precious metals from the use of legal tender is called demonetisation. On November 8, 2016 India demonetised the `500 and `1000 notes. It also announced the release of new `500 and `2000 notes.

Question. How do banks earn revenue?
Answer: Banks charge a higher interest rate on loans than what they offer on deposits. The difference between what is charged from borrowers and what is paid to depositors is their main source of income.

Question. Why do poor people borrow from informal sector?
Answer: There are no requirements of providing collaterals or documents in informal sector. Hence, poor people prefer to borrow from the informal sector.

Question. What would happen if all the depositors went to ask for their money at the same time?
Answer: The banks keep only 15% of the total deposits as provision to pay the depositors. If all the depositors went to ask for their money at the same time, then the banks will not be able to cater to the withdrawal needs of the depositors. This may also affect the lending process of the banks as it will have to use the major portion of the deposited money for demand deposits.

Question. What is the difference between debit card and credit card?
Answer: In a debit card, money is debited directly from your bank account whereas, in a credit card you need to repay the money used and with interest.

Question. “Most of the poor households still depend on the informal sector for loans, both in rural and urban areas of India.” Support the statement with three examples.
OR
“Poor households still depend on informal sources of credit.” Support the statement with examples.
Answer :
Poor households still depend on informal sources of credit because:
♦ Bank loans require proper documentation and collateral which is rarely available with poor households.
♦ Informal sources of credit such as moneylenders know the borrowers personally and are often willing to give a loan without a collateral.
♦ Sometimes, if the borrowers are unable to return the loan, they can get additional loans from moneylenders.

Question. How do SHGs help borrowers to overcome the problem of lack of collateral? Explain with an example.
Answer :
SHGs help borrowers to overcome the problem of lack of collateral in the following ways:
♦ It is the group that is responsible for the repayment of loan.
♦ Any case of non-payment of loan by any member is followed up seriously by other members.
♦ The formal sector is willing to lend to the members of SHGs because of their good track record of managing the credit.

Question. Why is there a great need to expand formal sector of credit in India? Explain any three reasons.
Answer : There is a great need to expand formal sector of credit in India because:
♦ There is no organisation to supervise the credit activities of lenders in informal sector.
♦ The rate of interest charged by the informal sector is very high as compared to formal sector.
♦ People who might wish to start a business by borrowing may not do so because of high cost of borrowing in informal sector.
♦ The higher interest rate of borrowing can mean that the amount to be repaid is greater than the income of the borrower in informal sector.

Question. “Money has made transactions easy.” Justify.
Answer : Money has made transactions easy because:
♦ It can be easily exchanged with any commodity or service.
♦ It solves the problem of double coincidence of wants.
♦ It is the perfect store of value.
♦ It makes economic activities quite independent from each other.

Question. How is money used as a medium of exchange? Explain with examples
Answer : Money is used as a medium of exchange because it serves as a common medium through which people can carry out buying and selling. Use of money makes
economic activities independent of each other. At the same time, it removes the inconvenience caused by the barter system.
For example, a person wants to sell sugar and buy wheat. He has to look for a person who wants sugar and has wheat to sell. In contrast, if in an economy, where money is used, the person who wants to sell sugar only has to look for a buyer for his sugar. The money which he will get can be used to purchase the wheat or any other commodity in the market. Since, money is used in the exchange process it is called a medium of exchange.

Question. In situations with high risks, credit might create further problems for the borrower.
Explain?
Answer : Whether a credit would be useful or not, will depend on a number of factors like – risks involved, whether there is some support against a loss, terms of credit etc. It is a fact that in situations with high risks, credit might create further problems for the borrower. For example, credit taken by farmers for cultivation might create problems for the farmer at some times. Crop production involves high costs on inputs such as HYV seeds, fertilizers, pesticides, irrigation etc.
Farmers generally take loans at the beginning of the season and repay the loan after harvest. But the failure of the crop makes loan repayment impossible. Then in order to repay the loan sometimes, they become bound to sell part of their land. So, their situations become worse than before. The incidences of farmers’ suicides especially in Maharashtra are the burning examples of this situation. Thus, whether a credit would be useful or not, depends on the various risks involved in the situation.

Question. How does money solve the problem of double coincidence of wants? Explain with example of your own.
Answer : In a barter system where goods are directly exchanged without the use of 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. For example, it is no longer necessary for the farmer to look for a book publisher who will buy his cereals at the same time sell him books. All he has to do is find a buyer for his cereals. If he has exchanged his cereals for money, he can purchase any goods or service which he needs. This is because money acts as a medium of exchange.

Question. How do banks mediate between those who have surplus money and those who need money?
Answer : We know that banks accept the deposits from the people who have surplus money and also pay an interest on the deposits.
But banks keep only a small portion (15 per cent in India) of their deposits as cash with themselves. This is kept as provision to pay the depositors who might come to withdraw money from their accounts in the bank on any 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.

Question. What are demand deposits? How is money safe in the banks? Explain.
Answer :
Deposits in the bank account which are payable on demand are called demand deposits.
Banks accept deposits from number of people. Some part of that money is given out as loan and the other part is kept with the banks for making payments. So, the money is safe with the banks.
The depositors can withdraw their money whenever they want.

Question. How can money be easily exchange for goods or services? Give an example to explain.
Answer :
Transactions are made in money because a person holding money can easily exchange it for any commodity or a service. It solves the problem of double coincidence of wants by acting as a medium of exchange.
For example, a shoe manufacturer wants to sell shoes in the market and wants to buy rice. Under barter system, both parties selling shoes and rice have to agree to buy and sell each other’s commodities and this creates a problem which is referred to as double coincidence of wants. This problem is overcome by the introduction of money. Now, the shoe manufacturer will sell the shoes for money and with that money he can buy rice.

Question. “The credit activities of the informal sector should be discouraged.” Support the statement with arguments.
Answer :
The credit activities of the informal sector should be discouraged because:
♦ There is no organisation to supervise the credit activities of the lenders in informal sector.
♦ The informal sector lends at a very high rate of interest and use unfair means to get the money back.
♦ Higher cost of borrowing means a large part of the earnings of the borrowers is used to repay the loan. Hence, the borrowers have less income left for themselves.
♦ Sometimes, due to higher rate of interest, the amount to be repaid becomes higher than the income of the borrower due to that there is always a risk for borrowers to fall in debt-trap.

Question. “Cheap and affordable credit is crucial for the country’s development.” Assess the statement.
Answer :
Cheap and affordable credit is crucial for a country’s development because:
♦ More lending would lead to higher incomes and encourage people to invest in agriculture, engage in business and set up small industries.
♦ Cheap credit will enable more investment. This leads to acceleration of economic activity.
♦ Cheap credit would also allow weaker sections of society to access formal sector of lending and get rid of from informal moneylenders.
♦ Affordable credit would also end the cycle of debt trap.
♦ Cheap and easy terms of credit would inspire better investment in technology and thus increase competition.

Question. What is a collateral? Why do lenders ask for collateral while lending? Explain
Answer :
A collateral is an asset such as land, building, livestock, vehicle or deposits with the banks that
the borrower owns and uses this as a guarantee to the lender until the loan is repaid.
The lenders ask for a collateral before lending because:
♦ It is an asset that the borrower owns and uses this as a guarantee to the lender – until the loan is repaid.
♦ Collateral with the lender acts as a proof that the borrower will return the money.
♦ By keeping a collateral with the lender, the borrower is bound to be regular in paying the interest because the borrower does not want to lose the collateral.

Question. What are the modern forms of money? Why is rupee widely accepted as a medium of exchange? Explain two reasons.
Answer : Modern forms of money include paper notes and coins.
Rupee is widely accepted as a medium of exchange because:
♦ It is authorised by the government of India.
♦ The law legalises the use of rupee as a medium of payment and settling the transactions.
Thus, no one can refuse a payment made in rupees.

Question. What are the functions of Reserve Bank  ?
Answer : a.The Reserve Bank of India supervises the functioning of formal sources of loans.
b. The RBI monitors that the banks actually maintain the cash balance.
c.  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.
d. Periodically, banks  have to submit information to the RBI on how much they are lending, to    whom, at what interest rate.

Question. Why are banks unwilling to lend loans to small farmers? Explain 
Answer : Small farmers fail to comply with collateral and documentation. (to be explained)

Question. Write 3 differences between Formal and Informal sources of loans. 
Answer :        

Question. How do banks mediate between those who have surplus money and those who are in need of money ?
Answer : a. People with surplus money deposit their money in the bank. Banks keep only a small proportion of their deposits as cash with themselves. For example, banks in India hold about 15 per cent of their deposits as cash.
b. The rest of the deposited money is used to extend loans to those who are in need of money.
c. Banks offer interest to those who have surplus money and charge interest from those who take loan from them.

Question. Why  people still prefer to take loan from informal sources.? Give 5 reasons.
Answer : a.  Know  lenders personally.
b. No complicated documentation.
c. Can get loan even before repayment of previous loan.
d. Collateral not required.
e. Do not have access of bank nearby.

Question. What is the basic idea behind the SGH ?
Answer : a. organize rural poor especially women in small Self Help groups.
b.collect  savings of members( can vary from Rs 25-Rs 100)
c.provide  loans without collateral
d.provide loans at reasonable rate of interest
e. After a year or two, if the group is regular in savings, it becomes eligible for availing loan from the  bank.

Question. How does money solves the problem of double coincidence of wants? Explain with an example.
Answer :
In barter system, where goods are directly exchanged without the use of money, double coincidence of wants (i.e. a person desires to sell exactly what the other person wishes to buy) is an essential feature. But it, indeed, is a very cumbersome process.
By serving as a medium of exchange, money removes the situation of double coincidence of wants and the difficulties associated with the barter system. For example, it is no longer necessary for a shoe manufacturer to* look for a farmer who will buy his shoes and at the same time sell him wheat. AH he has to do is to find a buyer for his shoes, who will exchange his money for shoes. Now, he can purchase wheat or any other good in the market with the help of the money earned. Thus, the problem of double coincidence of wants gets solved with the use of money.

Question. How is money used in everyday life? Explain with examples.
Answer :
In everyday life, money is used in following ways:
♦ It is used as a medium of exchange and facilitates the buying and selling of goods like car, house, food, clothes etc.
♦ It is used as deposits with the banks or to keep it at home like fixed deposits, bonds etc.
♦ It is used for borrowing and lending like loan.

Question. “Deposits with the banks are beneficial to the depositors as well as to the nation.” Examine the statement
Answer :
Deposits with the banks are beneficial to the depositors as well as to the nation in various ways.
Some of them are:
♦ They provide safe and secure deposits to a person’s money.
♦ They provide excellent saving and investment options and also help in the growth of the nation.
♦ They provide interests on the deposited money to the depositors.
♦ Money can be easily withdrawn from the banks as and when required by the depositors.
♦ They provide easy loans on nominal rates that make it possible for the common man to build their own assets.

Question. ‘Credit has its own unique role for development.’ Justify the statement with arguments.
Answer :
Credit has a unique role in the economic development of the country. It is needed by all the three sectors of the economy.
♦ In urban sector, big businessmen and small manufacturers need loans either to expand their enterprises, bring new technology or diversifying their businesses.
♦ In rural sector, the main demand for credit is for crop production. Crop production involves cost of seeds, fertilizers, pesticides, water, electricity, repair of equipments. Cheap credit would thus lead to increase in production.
♦ Even tertiary sector needs loans to buy the latest equipments and technology. Thus, we can say that credit has a unique role in the development of a country.

Question. How is money transferred from one bank account to another bank account? Explain with an example.
Answer :
For payment through cheque, the payer who has an account in the bank, draws out a cheque for a specific amount. The cheque is a statement asking the bank to pay a specific amount from the person’s account to the person in whose name the cheque has been issued.
For example, Aman has to pay a specific amount of money to Shruti, say ? 60,000. Aman will write a cheque in the name of Shurti. It means Aman instructs his bank to pay the money to Shurti. Shurti will deposit the cheque in her bank. After two or three days, the money will be transferred from Aman’s account to Shurti’s account.

Question. Explain with examples, how people are involved with the banks.
Answer :
People are involved with the banks in the following ways:
♦ Depositors
♦ Borrowers
♦ The people with excess money deposit it in the banks for safety. In turn they earn interest on the amount deposited.
At the same time, there are people who need money for various activities. They approach the banks for credit. The bank charges interest from the borrowers.

Question. Why do lenders ask for a collateral while lending? Give any three reasons.
Answer :
The lenders ask for a collateral before lending because:
♦ It is an asset that the borrower owns and uses this as a guarantee to the lender – until the loan is repaid.
♦ Collateral with the lender acts as a proof that the borrower will return the money.
♦ By keeping a collateral with the lender, the borrower is bound to be regular in paying the interest because the borrower does not want to lose the collateral.

LONG ANSWER TYPE QUESTIONS

Question. Why is it necessary for the banks and cooperative societies to increase their lending facilities in rural areas? Explain.
Answer :
Banks and cooperatives should extend their lending activities in rural areas because:
♦ Rural poor and farmers have to borrow money from moneylenders at a very high rate of interest. Therefore, the cost to the borrowing is very high.
♦ A large part of the earnings of borrower is used to repay the loans. Hence, they have less income.
♦ Sometimes, a higher rate of lending means that the amount to be repaid is more than the earnings of the borrower.
♦ To save the people from the clutches and exploitation by the moneylenders, it is necessary for the banks and co-operatives to extend their lending activities.
♦ It would lead to higher incomes and improve the condition of the rural poor.
♦ People can also start a business or set up a small scale industry.

Question. Why is modern currency accepted as a medium of exchange without any use of its own? Find out the reason.
Answer :
Modern money has been accepted as a medium of exchange because:
♦ It is authorised by the government of a India.
♦ It is issued by the apex bank on behalf of the government.
♦ No other individual is allowed to issue currency.
♦ The law of the country legalises its use as a medium of payment and setting transactions.
♦ No one in a country can refuse payment made in the currency of that country.

Question. How are deposits with the banks beneficial for individual as well as for the nation? Explain with examples.
Answer :
Deposits with the banks are beneficial to the depositors as well as to the nation in various ways.
Some of them are:
♦ They provide safe and secure deposits to a person’s money.
♦ They provide excellent saving and investment options and also help in the growth of the nation.
♦ They provide interests on the deposited money to the depositors.
♦ Money can be easily withdrawn from the banks as and when required by the depositors.
♦ hey provide easy loans on nominal rates that make it possible for the common man to build their own assets.

Question. What are Self-Help Groups? How are they emerging as an important source of credit? Explain.
Answer :
Self-Help Groups are a group of 15 to 20 poor villagers, especially women, who regularly pool money at regular intervals. When a member of the group is in need of money, he/she can get the loan from the group at a low rate of interest.
Self-Help Groups are emerging as an important source of credit because:
♦ They charge less interest on the loans than what the moneylenders charge.
♦ All decisions regarding savings and loans are taken by the members of the group.
♦ The members can take loans from the groups to meet their daily needs.
♦ If the group is regular in its savings, they can also take loan from the bank. Loan is sanctioned in the name of the group. The group is responsible for the repayment of loan.
♦ They help borrowers to overcome the problem of collateral.
♦ They have freed borrowers from the clutches of the moneylenders.

Question. How do banks play an important role in the economy of India? Explain
Answer :
Banks play an important role in developing the economy of India by taking the following steps:
♦ Banks keep money of the people in safe custody to be used by the depositors in future.
♦ Banks also increase the savings of the depositors by paying interest on the money deposited.
♦ Banks mediate between people who have surplus and those who need money. This is done through granting loans. People avail themselves of these loan facilities to increase production and income.
♦ Banks, being the formal source of credit, give loans at a very low rate of interest at flexible terms and conditions.
♦ Special provisions are made through banks for the upliftment of agriculture and industry like waiving of loans of the farmers.

Question. Explain with an example how credit plays a vital and positive role for development.
Answer :
Credit plays a vital and positive role in the following ways:
♦ It helps people from all walks of life in setting up their business, increase their income and provide support to their family needs.
♦ It makes it possible for the people to own or construct their own house and get relief from monthly rent.
♦ People often avail themselves of credit to purchase luxury items like vehicles, A.Cs, etc., which further raises their standard of living.
♦ It enables us to invest in human resource. People take credit for education, training, etc.
which allows enrichment of human resource.
♦ For example, Salim availed credit facility to meet the working capital needs of production. It helped him to meet the ongoing expenses of production, complete production on time, thereby, increasing his income.

Question. Describe the vital and positive role of credit with examples.
Answer :
Credit plays a vital and positive role in the following ways:
♦ It helps people from all walks of life in setting up their business, increase their income and provide support to their family needs.
♦ It makes it possible for the people to own or construct their own house and get relief from monthly rent.
♦ People often avail themselves of credit to purchase luxury items like vehicles, A.Cs, etc., which further raises their standard of living.
♦ It enables us to invest in human resource. People take credit for education, training, etc.
which allows enrichment of human resource.
♦ For example, Salim availed credit facility to meet the working capital needs of production. It helped him to meet the ongoing expenses of production, complete production on time, thereby, increasing his income.

Question. How can the formal sector loans be made beneficial for poor farmers and workers? Suggest any five measures.
Answer :
The formal sector loans can be made beneficial to poor farmers and workers in following ways:
♦ The process of providing loans should be made easier and accessible to them.
♦ Large number of banks and cooperatives should be opened in the rural areas.
♦ Banks and cooperatives should expand their facility of providing loans so as to decrease dependence on informal sector.
♦ Special focus should be paid on poor and small farmers along with small scale industries.
♦ Loan processing should be simple, faster and timely.

Question. Why is it necessary for banks and cooperatives to extend their lending activities in rural areas? Explain.
Answer :
Banks and cooperatives should extend their lending activities in rural areas because:
♦ Rural poor and farmers have to borrow money from moneylenders at a very high rate of interest. Therefore, the cost to the borrowing is very high.
♦ A large part of the earnings of borrower is used to repay the loans. Hence, they have less income.
♦ Sometimes, a higher rate of lending means that the amount to be repaid is more than the earnings of the borrower.
♦ To save the people from the clutches and exploitation by the moneylenders, it is necessary for the banks and co-operatives to extend their lending activities.
♦ It would lead to higher incomes and improve the condition of the rural poor.
♦ People can also start a business or set up a small scale industry.

Question. What are the two categories of sources of credit? Mention four features of each.
Answer :
The two categories of sources of credit are:
♦ Formal sources of credit
♦ Informal sources of credit
The features of formal sources of credit are:
♦ They charge low rate of interest and the mode of repayment is easy.
♦ They keep a collateral from the borrowers for granting loans.
♦ Reserve Bank of India supervises the functioning of formal sources of credit, (id) Urban households are largely depend on formal sources of credit.
♦ They include banks and cooperatives.
The features of informal sources of credit are:
♦ They charge higher rate of interest and the mode of repayment is very harsh.
♦ There is no need to keep a collateral in informal sources of credit.
♦ There is no organisation to supervise the functioning of informal sources of credit.
♦ Poor households are largely depend on informal sources of credit.
♦ They include moneylenders, relatives, friends etc.

Question. “Whether credit will be useful or not, depends upon the situation.” Give two different examples in support of this statement
Answer :
The two examples showing whether credit will be useful or not, depends upon the situation are:
♦ Chirag is a shoe manufacturer. During the festival season, he receives an order for 3,000 pair of shoes to be completed in a month. He employs two more workers for pasting and stitching.
He takes an advance payment from a large trader for 1,000 pair of shoes. He asks the leather supplier to supply leather and payment would be made later. Chirag completes the order in a month, makes a good profit and repay all the money that he had borrowed.
♦ Sapna, a small farmer, grows groundnut in her three acres of land. She took a loan from the moneylender, hoping to repay the loan, once the crop is harvested. Being hit by the pest, the crop fails. Expensive pesticides did not make any difference. Sapna is unable to repay the moneylender and the other year, it becomes a bigger amount. Next year again, she took a loan for cultivation. It is not a bumber crop this year too. Sapna earns little, but it is not enough to repay the old loans. She had to sell a part of the land to repay the loan. She is caught in a debt.
This situation is called debt-trap.
♦ Hence, we can say that it depends on situation whether credit will be useful or not.

Question. Which government body supervises the functioning of formal sources of loans in India? Explain its functioning.
Answer :
Reserve Bank of India supervises the functioning of formal sources of loans in India.
♦ It issues currency notes on behalf of the central government.
♦ It issues guidelines for fixing rate of interest on deposits and lending by banks. ,,
♦ It ensures that banks should maintain a minimum cash balance out of the deposits they receive.
♦ It ensures that the banks should give loans not only to profit making businesses but also to poor people and small traders.
♦ Periodically, the banks have to submit a report to the RBI on how much they are lending, to whom and at what interest rate.

Question. Describe any four advantages of Self-Help Groups for the poor.
Answer :
The advantages of Self-Help Groups for the poor are:
♦ They help the poor to become self-reliant in terms of savings and generating income as the decisions regarding savings are taken by the group members.
♦ They avail the facilities of loans from formal sources like banks at low rate of interest.
♦ They create self-employment opportunities by discussion within their group.
♦ They make it possible for the poor to avail timely finance without any collateral.

Question. Explain two points of differences between formal and informal sources of credit.
Answer : 

Question. Explain any four terms of credit with examples.
Answer :
The four terms of credit are:
♦ Interest rate. The borrower has to pay a sum of money as interest along with the principal amount.
♦ Collateral. It is an asset that the borrower owns and uses this as a guarantee – to the lender untill the loan is repaid.
♦ Documentation. Proper documents of borrowing with all the terms and conditions must be submitted.
♦ Mode of repayment. The mode through which the borrower will repay the loan must be clearly mentioned. Long-term loans can be repaid in annual, half yearly or monthly installments.

Question. How does the use of money make exchange of things easier? Explain with examples.
Answer :
Money is used as a medium of exchange because it serves as a common medium through which people can carry out buying and selling. Use of money makes economic activities independent of each other. At the same time, it removes the inconvenience caused by the barter system.
For example, a person wants to sell sugar and buy wheat. He has to look for a person who wants sugar and has wheat to sell. In contrast, if in an economy, where money is used, the person who wants to sell sugar only has to look for a buyer for his sugar. The money which he will get can be used to purchase the wheat or any other commodity in the market. Since, money is used in the exchange process it is called a medium of exchange.
Let us take an example of a farmer who wants to sell wheat and wants to buy goat in lieu of that.
If he opts for barter system, he will have to search a person who may be interested in giving off his goat and in taking wheat. But finding such a person can be difficult and time-consuming. On the other hand, if the farmer sells wheat and takes money for that, he can easily go and purchase goat with that money.

Question. Why are the deposits in the banks called ‘demand deposits’? What are the benefits of deposits with the banks?
Answer :
People deposit the surplus or extra money in the banks. The banks keep the money safe and provide interest on it. The deposits can be drawn at any time on demand by the depositors. That is why they are called demand deposits.
The benefits of deposits with the banks are:
♦ They can be encashed by issuing cheques in the name of the person to whom the payment is to be made.
♦ They make it possible to directly settle payments without the use of cash.
♦ Since demand drafts/cheques are widely accepted as a means of payment along with currency, they constitute money in the modern economy.

Question. Why do we need to expand formal sources of credit in India?
Answer : We need to expand formal sources of credit in India for many reasons:
♦ Compared to formal lenders, most of the informal lenders charge much higher interest rates on loans like 3% to 5% per month i.e. 36% a year.
♦ Besides the high interest rate, informal lenders impose various other tough conditions. For example, they make the farmers promise to sell the crop to him at a low price. There is no such condition in formal sector.
♦ Informal lenders do not treat well with the borrowers. On the other hand, there is no such situation no such situation in the formal sector.
♦ The Reserve Bank of India supervises the functioning of formal sources of loans. In contrast, there no organization which supervises the credit activities of lenders in the informal sector.
♦ Loans taken by poor people from informal lenders sometimes, lead them to debt-trap because of high interest rate.
♦ The formal sources of credit in India still meets only about half of the total credit needs of the rural people.
So, it is necessary that the formal sources of credit expand their lending especially in rural areas, so that the dependence on informal sources of credit reduces as this will also help in the development of the country.

Question. How does credit plays a vital and positive role? Explain with suitable example.
Answer :
Credit plays a vital and positive role in the following ways:
♦ It helps people from all walks of life in setting up their business, increase their income and provide support to their family needs.
♦ It makes it possible for the people to own or construct their own house and get relief from monthly rent.
♦ People often avail themselves of credit to purchase luxury items like vehicles, A.Cs, etc., which further raises their standard of living.
♦ It enables us to invest in human resource. People take credit for education, training, etc.
which allows enrichment of human resource.
♦ For example, Salim availed credit facility to meet the working capital needs of production. It helped him to meet the ongoing expenses of production, complete production on time, thereby, increasing his income.

Question. What is money? Why is modern money currency accepted as a medium of exchange?
Answer :
Money is anything which has common acceptability as a means of exchange, a measure and a store of value.
Modern money has been accepted as a medium of exchange because:
♦ It is authorised by the government of a India.
♦ It is issued by the apex bank on behalf of the government.
♦ No other individual is allowed to issue currency.
♦ The law of the country legalises its use as a medium of payment and setting transactions.
♦ No one in a country can refuse payment made in the currency of that country.

Question. Why is cheap and affordable credit important for the country’s development? Explain any three reasons.
Answer :
Cheap and affordable credit is crucial for a country’s development because:
♦ More lending would lead to higher incomes and encourage people to invest in agriculture, engage in business and set up small industries.
♦ Cheap credit will enable more investment. This leads to acceleration of economic activity.
♦ Cheap credit would also allow weaker sections of society to access formal sector of lending and get rid of from informal moneylenders.
♦ Affordable credit would also end the cycle of debt trap.
♦ Cheap and easy terms of credit would inspire better investment in technology and thus increase competition.