Chapter 3 Money and Credit NCERT Solutions for Class 10 Economics

money and credit important question answers
 

NCERT Solutions for Class 10 Economics Chapter 3 Money and Credit – Important Questions 

 
Given in this post  is NCERT Solutions for Class 10 Economics Chapter 3 Money and Credit. The important questions we have compiled will help the students to brush up on their knowledge about the subject. Students can practice Class 10 Economics important questions to understand the subject better and improve their performance in the board exam. The NCERT solutions provided here will also give students an idea about how to write the answers.

 

 

CHAPTER 3 

MONEY AND CREDIT

 
 

MCQ BASED QUESTIONS

 

Q1 In a SHG, most of the decisions regarding savings and loan activities are taken by- (NCERT QUESTION)

A Bank

B Members

C Non-government organisation

D None of the above 

 

Ans B Members

 

Q2 Formal sources of credit does not include- (NCERT QUESTION)

A Banks

B Cooperatives

C Employers

D All of the above

 

Ans C Employers

 

Q3 Double coincidence of wants means ____________. 

A What a person desires to sell is exactly what the other person wishes to buy.

B what a person desires to sell is exactly what the other person also wishes to sell.

C what a person desires to buy is exactly what the other person also wishes to buy.

D None of the above.

 

Ans A What a person desires to sell is exactly what the other person wishes to buy.

 

Q4 In India, _____________ issues currency notes on behalf of the Central Government. 

A Reserve Bank of India (RBI)

B Ministry of Finance

C Finance Commission

D None of the above

 

Ans A Reserve Bank of India (RBI)

 

Q5 In a barter system where goods are directly exchanged without the use of money, double coincidence of wants is an essential feature. 

A False

B True

 

Ans B True

 

Q6 Banks in India these days hold about _________ of their deposits as cash. 

A 25 percent

B 20 percent

C 15 percent

D 5 percent

 

Ans C 15 percent

 

Q7 Which of the following statements are true?

A  As per Indian law, apart from RBI, no other individual or organisation is allowed to issue currency.

B The law legalises the use of rupee as a medium of payment that cannot be refused in settling transactions in India

C No individual in India can legally refuse a payment made in rupees.

D All of the above are true.

 

Ans D All of the above are true.

 

Q8 Banks use the major portion of the deposits to ______. 

A Extend loans

B Invest in infrastructure

C Deposit in foreign banks

D None of the above

 

Ans A extend loans

 

Q9 The difference between what is charged from borrowers and what is paid to depositors is the main source of banks income. 

A True

B False

 

Ans A True

 

Q10 In rural areas, the main demand for credit is for ________. 

A Purchasing land

B Purchasing house

C Medical expenses

D Crop production

 

Ans D crop production

 

Q11 Which of the following is an example of collateral? 

A Livestocks

B Land

C Deposits with banks

D All of the above

 

Ans D All of the above

 

Q12 Which of the following are examples of the informal sector loans? 

A Moneylenders

B Traders

C Cooperatives

D Only A and B

 

Ans D Only A and B

 

Q13 Which of the following statements are correct? 

A Members of a cooperative pool their resources for cooperation in certain areas.

B Besides banks, the other major source of cheap credit in rural areas are the cooperative societies.

C There are several types of cooperatives possible such as farmers cooperatives, weavers cooperatives, industrial workers cooperatives. 

D All of the above statements are true. 

 

Ans D All of the above statements are true. 

 

Q14 What are the different components of the terms of credit? 

A Interest rate

B Documentation requirements

C Collateral

D All of the above

 

Ans D All of the above

 

Q15 As of 2012, the major source of credit to the rural households in India was _______. 

A Moneylenders.

B Commercial banks.

C Cooperative societies.

D Relatives and friends.

 

Ans A Moneylenders.

 

Q16 Which of the following statements are false? 

A There is no organisation which supervises the credit activities of lenders in the informal sector.

B RBI stops the money lenders from using unfair means to get their money back.

C Compared to the formal lenders, most of the informal lenders charges much lesser interest on loans

D Only B and C

 

Ans D Only B and C

 

Q17 Which of the following statements are true? 

A Periodically, banks do not submit information to the RBI on how much they are lending, to whom, at what interest rate, etc

B The Reserve Bank of India does not supervise the functioning of formal sources of loans.

C The RBI monitors the banks in actually maintaining cash balance.

D None of the above statements are true.

 

Ans C The RBI monitors the banks in actually maintaining cash balance.

 

Q18 ___________ of the loans taken by rich households in the urban areas are from formal sources. 

A 20 percent

B 10 percent

C 15 percent

D 90 percent

 

Ans D 90 percent

 

Q19 ___________ of the loans taken by poor households in the urban areas are from informal sources. 

A 85 percent

B 70 percent

C 65 percent

D 50 percent

 

Ans A 85 percent

 

Q20 ___________ of the loans taken by well-off households in the urban areas are from formal sources. 

A 54 percent

B 64 percent

C 72 percent 

D 90 percent

 

Ans C 72 percent

 

Q21 ___________ of the loans taken by households with few assets in the urban areas are from informal sources. a) b) c) d) 

A 72 percent

B 28 percent

C 53 percent

D 47 percent

 

Ans C 53 percent

 

Q22 Which of the following could lead to a debt trap?

A The high interest rate for borrowing can mean that the amount to be repaid is greater than the income of the borrower.

B Higher cost of borrowing means a larger part of the earnings of the borrowers is used to repay the loan.

C The high interest rate for borrowing can mean that the amount to be repaid is lesser than the income of the borrower. 

D Both A and B

 

Ans D Both A and B

 

Q23 Rohan has taken a loan of Rs.5 lakhs from the bank to purchase a house on 12% rate of interest. He has to submit papers of new house and salary record to the bank. What is this process called? (CBSE SAMPLE PAPER 2022-23)

A Interest Rate 

B Collateral 

C Principal Amount 

D Installments

 

Ans B Collateral  

 

Q24 Mohan is an agricultural labourer. There are several months in a year when he has no work and needs credit to meet his daily expenses. He depends upon his employer, the landowner for credit who charges an interest rate of 5 per cent per month. Mohan repays the money by working physically for the landowner on his farmland. Over the years his debt will – (CBSE SAMPLE PAPER 2020-21)

A Increase – because of increasing interest and non-payment of monthly amount 

B Remain constant – as he is working for the employer but is repaying less 

C Reduce – as amount equivalent to his salary is being counted as monthly repayment 

D Be totally repaid – as he is repaying the debt in the form of physical labour

 

Ans A Increase – because of increasing interest and non-payment of monthly amount 

 

Q25 Mohan is an agricultural labourer. There are several months in a year when he has no work and needs credit to meet his daily expenses. He depends upon his employer, the landowner for credit who charges an interest rate of 5 per cent per month. Mohan repays the money by working physically for the landowner on his farmland. Most of the agricultural labourers like Mohan depend upon loans from the informal sector. Which of the following statements about this sector is correct –  (CBSE SAMPLE PAPER 2020-21)

A There are government bodies to supervise informal sector 

B Money lenders ask for a reasonable rate of interest 

C Cost of informal loans to the borrower is quite high

D Money lenders use fair means to get their money back

 

Ans C Cost of informal loans to the borrower is quite high

 

Q26 Which one of the following options describe ‘Collateral’? (CBSE SAMPLE PAPER 2020-21)

A Double coincidence of wants 

B Certain products for barter 

C Trade in barter 

D Asset as guarantee for loan

 

Ans D Asset as guarantee for loan

 

Q27 Find the Incorrect option: (CBSE SAMPLE PAPER 2019-20) 

A Demand deposit share the essential features of money 

B With demand deposit payments can be made without cash 

C Demand deposits are safe way of money transformation 

D Demand deposit facility is like cheque

 

Ans D Demand deposit facility is like cheque

 

Q28 Rita has taken a loan of Rs.7 lakhs from the bank to purchase a car. The annual interest rate on the loan is 14.5 percent and the loan is to be repaid in 3 years in monthly installments. The bank retained the papers of the new car as collateral, which will be returned to Rita only when she repays the entire loan with interest. 

Analyse the loan information given above, considering one of the following correct options. (CBSE SAMPLE PAPER 2019-20) 

A Mode of repayment 

B Terms of credit 

C Interest on loan 

D Deposit criteria

 

Ans B Terms of credit 

 

 
 

1 MARK QUESTIONS

 

Q1 Why are transactions made in money?

 

Ans A person holding money can easily exchange it for any commodity or service that he or she might want.

 

Q2 How is money beneficial in transactions?

 

Ans Money is beneficial in transactions as it eliminates the need for double coincidence of wants. It acts as a medium of exchange.

 

Q3 What is ‘double coincidence of wants’?

 

Ans What a person desires to sell is exactly what the other wishes to buy.

 

Q4 What is a barter system?

 

Ans When goods are directly exchanged for goods and there is no use of money, it is called barter system.

 

Q5 How does the use of money make it easier to exchange things? Give an example.

OR

Why is money called a medium of exchange? (CBSE SAMPLE PAPER 2018-19)

 

Ans A person holding money can easily exchange it for any commodity or service that he or she might want.

Example: The shoe manufacturer will first exchange shoes that he has produced for money and then exchange the money for wheat.

 

Q6 Why one cannot refuse a payment made in rupees in India? (CBSE 2016)

 

Ans One cannot refuse a payment made in rupees in India: Because it is accepted as a medium of exchange. The currency is authorized by the government of the country.

 

Q7 Highlight the inherent problem in double coincidence of wants. (CBSE 2017)

 

Ans The inherent problem in double coincidence of wants is that both parties have to agree to sell and buy each others commodities.

 

Q8 What was used as money in early ages in India?

 

Ans In the very early ages, Indians used grains and cattle as money.

 

Q9 Which metals were used for making coins in India in later stages?

 

Ans Gold, Copper, Silver coins were used in later stages for making coins in India.

 

Q10 What does the modern form of money include?

 

Ans Modern form of money includes currency-that is paper notes and coins.

 

Q11 Does modern currency have any use of its own?

 

Ans Unlike the things that were used as money earlier, modern currency is not made of precious metals such as gold, silver and copper. And unlike grain and cattle, they are neither of everyday use. The modern currency is without any use of its own.

 

Q12 Why is modern currency accepted as a medium of exchange?

 

Ans It is accepted as a medium of exchange because the currency is authorised by the government of the country.

 

Q13 In India, who is authorised to issue notes and currency?

 

Ans In India, the Reserve Bank of India’ issues currency notes on behalf of the central government.

 

Q14 What are ‘demand deposits’?

 

Ans People deposit their money in the bank as it earns interest. Since the deposits in the bank accounts can be withdrawn on demand, these deposits are called demand deposits.

 

Q15 What is a ‘cheque’? (CBSE 2017)

 

Ans A cheque is a paper, instructing the bank to pay a specific amount from the person’s account to the person on whose name the cheque has been issued.

 

Q16 What do the banks do with the deposits which they accept from the public?

 

Ans (i) Banks keep only a small proportion of their deposits as cash with themselves. 

(ii) Major portions of the money deposits are used to extend loans.

 

Q17 How do banks act as a mediator?

 

Ans Banks mediate between those who have surplus funds (depositors) and those who are in need of these funds (the borrowers).

 

Q18 Why is it difficult for the poor to get loans from Banks? (CBSE 2017)

 

Ans Absence of Collateral is one of the major reasons which prevent the poor from getting bank loans.

 

Q19 What is the main source of income of the banks, if they forward the depositor’s money to the lender?

 

Ans Banks 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 depositors is their main source of income.

 

Q20 What is ‘credit’?

 

Ans Credit (loan) refers to an agreement in which the lender supplies the borrowers with money, goods or services in return for the promise of future payment.

 

Q21 What do the farmers in rural areas take loans for?

 

Ans Farmers take loans for crop production which involves considerable costs on seeds, fertilizers, pesticides, water, electricity, repair of equipment, etc.

 

Q22 What is a ‘debt trap’?

 

Ans Credit in some cases pushes the borrower into a situation from which recovery is very painful.

 

Q23 What is ‘collateral’?

OR

Why do banks ask for collateral while giving loans? (CBSE SAMPLE PAPER 2018-19) 

 

Ans ‘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.

 

Q24 What are the main ‘terms of credit’?

 

Ans Interest rate, collateral and documentation requirement and the mode of repayment together comprise what is called ‘terms of credit’.

 

Q25 What are informal sectors of loan?

 

Ans Informal sectors include moneylenders, traders, employers, relatives and friends, etc.

 

Q26 What are the formal sectors of loan?

 

Ans Formal sectors of loan include all the banks and cooperatives.

 

Q27 Why are most of the poor households deprived from the formal sector of loans? (CBSE 2016)

 

Ans Most of the poor households are deprived from the formal sector of loans because of:

(i) Lack of collateral. 

(i) They are illiterate.

(iii) Cannot fulfill the formalities of the formal sector of loans.

 

Q28 What report is submitted periodically by all the banks to the RBI?

 

Ans Periodically, banks have to submit information to the RBI on how much they are lending, to whom and at what rate.

 

Q29 Why do informal sectors charge interest rate at their own risks?

 

Ans There is no organisation which supervises the credit activities of lenders in the informal sector. Therefore, they lend at whatever interest rate they choose. No one stops them from using unfair means to get their money back.

 

Q30 Why do banks and cooperatives need to lend more?

 

Ans Banks and cooperative societies need to lend more. This would lead to higher incomes and many more could then borrow cheaply for a variety of needs. Cheap and affordable credit is crucial for the country’s development.

 

Q31 Why should credit at reasonable rates be available to all?

 

Ans At present, it is the rich households who receive formal credit whereas the poor have to depend on the informal sources. It is important that the formal credit is distributed more equally so that the poor can benefit from the cheaper loans.

 

Q32 What prevents the poor from getting bank loans?

 

Ans Bank loans require proper documents and collateral. Absence of collateral is one of the major reasons which prevents the poor from getting bank loans.

 

Q33 Prove with an argument that there is a great need to expand formal sources of credit in rural India. (CBSE 2016)

 

Ans To expand formal sources of credit in rural India, dependence on informal sources of credit has to be reduced.

 

Q34 What are SHGs?

 

Ans They are Self Help Groups, who provide mutual support to each other.

 

Q35 For what purposes do SHGs give loans to its members?

 

Ans Small loans are provided to the members for releasing mortgaged land, for meeting working capital needs like buying seeds, fertilizers, raw materials like bamboo and cloth for housing, materials for acquiring assets like sewing machines, handloom, cattle, etc.

 

Q36 Give any two advantages of SHGs.

 

Ans (i) SHGs help borrowers overcome the problem of collateral.

(ii) They can get timely loans for a variety of purposes and at reasonable rates.

 

Q37 How does the use of money make it easier to exchange things?

 

Ans In an economy where money is in use, it eliminates the need for double coincidence of wants by providing the crucial intermediate step.

 

Q38 What do you mean by the term ‘collateral’? (CBSE SAMPLE PAPER 2017)

 

Ans It is an asset that the borrower owns and uses this guarantee to a lender until the loan is repaid.

 

Q39 Recognize the situation when both the parties in a barter economy have to agree to sell and buy each other’s commodities? What is it called? (CBSE SAMPLE PAPER 2016)

 

Ans This is known as double coincidence of wants.

 

Q40 Amit is using his money to buy assets like house, commercial land and machines. Write what he is actually doing? (CBSE SAMPLE PAPER 2016)

 

Ans He is investing his money with a hope of earning profits from these assets.

 

Q41 How do deposits with banks become their source of income? (CBSE 2016)

 

Ans The Source of income of banks: Banks charge higher interest rate on loans than what they offer on deposits. The difference of interest is the main source of income of banks.

 

Q42 Compare formal sector loans with informal sector loans regarding interest only. (CBSE 2016)

 

Ans Comparison of formal sector loans with informal: Most of the informal lenders charge a much higher interest on loans than the formal sector loans.

 

Q43 Why is the supervision of the functioning of formal sources of loans necessary? (CBSE 2016)

 

Ans Supervision of the functioning of formal sources of loans is necessary because-Banks have to submit information to the RBI on how much they are lending to when they are lending and what interest rate, etc.

 

Q44 How does money eliminate the need for double coincidence of wants? (CBSE 2016)

 

Ans If you have money in your pocket, you can purchase any thing at any time as you wish.

 

 
 

Assertion-reason based questions:

 

Q1 Assertion (A): Banks charge a higher interest rate on loans than what they offer on deposits.

Reason (R): The difference between what is charged from borrowers and what is paid to depositors is their main source of income.

Options: 

  1. Both A and R are true and R is the correct explanation of A. 
  2. Both A and R are true but R is not the correct explanation of A. 
  3. A is correct but R is wrong. 
  4. A is wrong but R is correct.

 

Ans a. Both A and R are true and R is the correct explanation of A.

 

Q2 Assertion (A): Credit would be useful or not depending on the risk involved in a situation.

Reason (R): The chance of benefiting from credit is highest in the agriculture sector.

Options:

  1. Both A and R are true and R is the correct explanation of A.
  2. Both A and R are true but R is not the correct explanation of A.
  3. A is correct but R is wrong.
  4. A is wrong but R is correct.

 

Ans c. A is correct but R is wrong as the chance of benefiting from credit is not the highest in the agriculture sector.

 

Q3 Assertion (A): Collateral is an asset that the borrower owns (such as land, building, vehicle, livestock, deposits with banks) and uses this as a guarantee to a lender until the loan is repaid.

Reason (R): Collateral is given so the lender can sell the collateral to recover the loan amount if the borrower fails to repay the loan.

Options: 

  1. Both A and R are true and R is the correct explanation of A. 
  2. Both A and R are true but R is not the correct explanation of A. 
  3. A is correct but R is wrong. 
  4. A is wrong but R is correct.

 

Ans a. Both A and R are true and R is the correct explanation of A.

 

Q4 Assertion (A): Banks keep only a small proportion of their deposits as cash with themselves.

Reason (R): Banks in India these days hold about 15 per cent of their deposits as cash.

Options: 

  1. Both A and R are true and R is the correct explanation of A. 
  2. Both A and R are true but R is not the correct explanation of A. 
  3. A is correct but R is wrong. 
  4. A is wrong but R is correct.

 

Ans b. Both A and R are true but R is not the correct explanation of A.

 

Q5 Assertion (A): The Reserve Bank of India supervises the functioning of formal sources of loans. 

Reason (R): 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.

Options: 

  1. Both A and R are true and R is the correct explanation of A. 
  2. Both A and R are true but R is not the correct explanation of A. 
  3. A is correct but R is wrong. 
  4. A is wrong but R is correct.

 

Ans b. Both A and R are true but R is not the correct explanation of A. 

 

Q6 Assertion (A): In India, no individual can refuse to accept a payment made in rupees. 

Reason (R): Rupee is the legal tender in India.

Options: 

  1. Both A and R are true and R is the correct explanation of A. 
  2. Both A and R are true but R is not the correct explanation of A. 
  3. A is correct but R is wrong. 
  4. A is wrong but R is correct.

 

Ans a. Both A and R are true and R is the correct explanation of A. 

 

Q7 Assertion (A): Sohan took credit in the form of advance payment from a buyer and he delivered the goods to the buyer on time and also earned profit. The credit made Sohan better off in this situation. 

Reason (R): Credit can never push a person into a debt trap.

Options: 

  1. Both A and R are true and R is the correct explanation of A. 
  2. Both A and R are true but R is not the correct explanation of A. 
  3. A is correct but R is wrong. 
  4. A is wrong but R is correct.

 

Ans c. A is correct but R is wrong.

 

Q8 Assertion (A): The modern currency is used as a medium of exchange; however, it does not have a use of its own. 

Reason (R): Modern currency is easy to carry.

Options: 

  1. Both A and R are true and R is the correct explanation of A. 
  2. Both A and R are true but R is not the correct explanation of A. 
  3. A is correct but R is wrong. 
  4. A is wrong but R is correct.

 

Ans b. Both A and R are true but R is not the correct explanation of A. 

 

Q9 Assertion (A): Members can take small loans from the group itself to meet their needs through Self-Help Groups. 

Reason (R): SHGs are the building blocks of organisation of the rural poor.

Options: 

  1. Both A and R are true and R is the correct explanation of A. 
  2. Both A and R are true but R is not the correct explanation of A. 
  3. A is correct but R is wrong. 
  4. A is wrong but R is correct.

 

Ans b. Both A and R are true but R is not the correct explanation of A as members can take small loans from the group itself to meet their needs as the group charges interest on these loans but this is still less than what the moneylender charges. On the other hand, Self Help Groups are generally considered the building blocks of organisation of the rural poor. Hence, both assertion and reason are true but reason is not the correct explanation of assertion.

 

 
 

Fill in the blanks in the following:

 

Q1 Majority of the credit needs of the ___________ households are met from informal sources. (NCERT QUESTION)

 

Ans poor

 

Q2 __________ costs of borrowing increase the debt-burden. (NCERT QUESTION)

 

Ans High

 

Q3 _______________  of India issues currency notes on behalf of the Central Government. (NCERT QUESTION)

 

Ans Reserve Bank

 

Q4 Banks charge a higher interest rate on loans than what they offer on ____________ . (NCERT QUESTION)

 

Ans deposits

 

Q5 ______________ is an asset that the borrower owns and uses as a guarantee until the loan is repaid to the lender. (NCERT QUESTION)

 

Ans Collateral

 

Q6 Both parties have to agree to sell and buy each others commodities. This is known as _____________.

 

Ans Double coincidence of wants

 

Q7 In _________________, goods are directly exchanged without the use of money.

 

Ans Barter system

 

Q8 ________ by providing the crucial intermediate step eliminates the need for double coincidence of wants.

 

Ans Money

 

Q9 As per Indian law, no other individual or organization is allowed to issue _____________.

 

Ans Currency

 

Q10 A ____________ 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.

 

Ans cheque

 

Q11 Interest rate, collateral and documentation requirement, and the mode of repayment together comprise what is called the _____________. 

 

Ans Terms of credit

 

Q12 An example of a Self- Help Group is ____________.

 

Ans Stree Shakti

 

 
 

2 MARK QUESTIONS

 

Q1 Give any two advantages of SHGs.

 

Ans (i) SHGs help borrowers overcome the problem of collateral.

(ii) They can get timely loans for a variety of purposes and at reasonable rates.

 

Q2 How does the use of money make it easier to exchange things? Give an example.

 

Ans A person holding money can easily exchange it for any commodity or service that he or she might want.

Example: The shoe manufacturer will first exchange shoes that he has produced for money and then exchange the money for wheat.

 

Q3 Does modern currency have any use of its own?

 

Ans Unlike the things that were used as money earlier, modern currency is not made of precious metal such as gold, silver and copper. And unlike grain and cattle, they are neither of everyday use. The modern currency is without any use of its own.

 

Q4 What is the main source of income of the banks, if they forward the depositor’s money to the lender?

 

Ans Banks 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 depositors is their main source of income.

 

Q5 Why do informal sectors charge interest rate at their own risks?

 

Ans There is no organisation which supervises the credit activities of lenders in the informal sector. Therefore, they lend at whatever interest rate they choose. No one stops them from using unfair means to get their money back.

 

Q6 Why do banks and cooperatives need to lend more?

 

Ans Banks and cooperative societies need to lend more. This would lead to higher incomes and many more could then borrow cheaply for a variety of needs. Cheap and affordable credit is crucial for the country’s development.

 

Q7 For what purposes do SHGs give loans to its members?

 

Ans Small loans are provided to the members for releasing mortgaged land, for meeting working capital needs like buying seeds, fertilizers, raw materials like bamboo and cloth for housing, materials for acquiring assets like sewing machines, handloom, cattle, etc.

 

Q8 Why should credit at reasonable rates be available to all?

 

Ans At present, it is the rich households who receive formal credit whereas the poor have to depend on the informal sources. It is important that the formal credit is distributed more equally so that the poor can benefit from the cheaper loans.

 

Q9 What are ‘demand deposits’?

 

Ans People deposit their money in the bank as it earns interest. Since the deposits in the bank accounts can be withdrawn on demand, these deposits are called demand deposits.

 

Q10 Why might banks be unwilling to lend to small farmers? 

 

Ans Banks require proper documentations and collateral as security against providing loans. But there are situations where small farmers lack in providing such documentation and collateral and even fail to repay the loan in time due to crop failure. Therefore, the banks would not prefer to lend money to small farmers.

 

Q11 Which objects were used as money? 

 

Ans (i) Before the introduction of coins, a variety of objects were used as money. For example, since the very early ages, Indians used grains and cattle as money. 

(ii) Thereafter came the use of metallic coins-a phase which continued well into the last century.

 

 
 

3 MARK QUESTIONS

 

Q1 How does money solve the problem of double coincidence of wants? Explain with an example of your own. (NCERT QUESTION)

 

Ans 1. Double coincidence of wants is an essential feature, where goods are directly exchanged without the use of money, also known as the ‘Barter system’. 

  1. By serving as a medium of exchanges, money removes the need for double coincidence of wants and the difficulties associated with the barter system. 
  2. For example- a farmer no longer has to look for a shoe maker, who will buy his cereals and at the same time and sell him shoes. 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 services which he needs to. This is because money acts as a medium of exchange. 

 

Q2 How do banks mediate between those who have surplus money and those who need money? (NCERT QUESTION)

 

Ans 1. Banks keep small deposits as cash (15%) for themselves (to pay the deposits on demand). 

  1. They use the major portion of the deposits to extend loans to those who need money. 
  2. In this way, banks mediate between those who have surplus money and those who need money.

 

Q3 Look at a 10 rupee note. What is written on top? Can you explain this statement? (NCERT QUESTION)

 

Ans 1. There are two things which are mentioned on top right on a 10 rupee note; ‘Reserve Bank of India’ and ‘Guaranteed by the Government’. 

  1. The Reserve Bank of India issues currency notes on behalf of the central government of India. 
  2. The statement explains that the currency is authorised or guaranteed by the Central Government. That is, Indian law legalises the use of rupee as a medium of payment that cannot be refused in settling transactions in India. 

 

Q4 Why do we need to expand formal sources of credit in India? (NCERT QUESTION) (CBSE SAMPLE PAPER 2019-20) (CBSE SAMPLE PAPER 2019-20)

 

Ans We need to expand formal sources of credit in India:

  1. To reduce dependence on informal sources of credit because the latter charge high interest rates and do not benefit the borrower much. 
  2. The Reserve Bank of India supervises the functioning of formal sources of loans. In contrast, there is no organisation which supervises the functioning of informal source of loans or the credit activities of lenders in the informal sector.
  3. After taking loans from informal lenders sometimes, leads the borrowers to debt trap because of the high interest rates.

In India, the formal sector sources of credit are still only about half of the total credit needs of the rural people. Thus, it is necessary for the formal sources of credit to expand their lending especially in rural areas, so that the dependency on the formal sources of credit are increased, which would benefit the development of the country on a wider scale.

 

Q5 In what ways does the Reserve Bank of India supervise the functions of Banks? Why is this necessary? (NCERT QUESTION)

OR

State the role of the Reserve Bank of India. (CBSE SAMPLE PAPER 2021-22)

 

Ans The Reserve Bank of India supervises the functions of banks in various ways:

  1. RBI holds a part of the cash reserve of the commercial banks. RBI mainly ensures that the banks maintain a minimum cash balance out of the deposits they receive. 
  2. The commercial banks have to submit information to RBI on how much they are lending, to whom, and at what interest rate, etc.
  3. RBI observes that the Banks are not only providing loans to profitable businesses but also to traders and small cultivators, small scale industries, small borrowers etc.

 

Q6 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. (NCERT QUESTION)

 

Ans It would be Manav’s decision to borrow money from the bank or the money lender on the basis of the following terms of credit: 

  1. Depending on the suitable rate of interest
  2. Requirements availability of collateral and documentation required by banker.
  3. Mode of repayment. 

Depending on these factors and of course, easier terms of repayment.

 

Q7 Give an example to show that double coincidence of wants is necessary in a barter system.

 

Ans 1. A shoe manufacturer wants to sell shoes in the market and buy wheat. The shoe manufacturer will first exchange shoes that he had produced for money, and then exchange the money for wheat. 

  1. Imagine how difficult it would be if the shoe manufacturer had to directly exchange shoes for wheat without using money. He would have to look for a wheat growing farmer, who not only wants to sell wheat but also wants to buy the shoes in exchange. 
  2. That is, both parties have to agree to sell and buy each other’s commodities. This is known as double coincidence of wants.

 

Q8 How is the modern form of currency accepted as a medium of exchange?

OR

Why is currency accepted as a medium of exchange?

 

Ans 1. Modern forms of money include currency-paper notes and coins.

  1. Modern currency is not made of precious metals such as gold, silver and copper. 
  2. The modern currency is without any use of its own.
  3. In India, the Reserve Bank of India issues currency notes on behalf of the Central government.
  4. As per the Indian law, no other individual or organisation is allowed to issue currency.
  5. No individual in India can legally refuse a payment made in rupees.

 

Q9 “Banks are an efficient medium of exchange.” Support the statement with arguments. (CBSE 2017)

 

Ans Banks are efficient medium of exchange:

(i) Demand deposits share the essential features of money.

(ii) The facility of cheque against demand deposit makes it possible to directly settle payment without the use of cash.

(iii) Demand deposits are accepted widely as a means of payment.

 

Q10 What are ‘demand deposits’?

 

Ans 1. Workers who receive their salaries at the end of each month have extra cash at the beginning of the month.

  1. This extra cash is deposited with the bank by opening a bank account in their name.
  2. Banks accept the deposits and also pay an interest rate on the deposits.
  3. In this way, people’s money is safe with the banks and it earns an interest as well.
  4. People also have the provision to withdraw the money as and when they require.
  5. Since the deposits in the bank accounts can be withdrawn on demand, these deposits are called demand deposits.

 

Q11 How are demand deposits accepted as a means of payment?

 

Ans (i) Demand deposits offer another interesting facility. It helps in making the payment in cheque. 

(ii) A cheque is a paper instructing the bank to pay a specific amount from the person’s account to the other person or to the account holder.

(iii) Thus, we see that demand deposits share the essential features of money.

(iv) The facility of cheques against demand deposits makes settlement of payments possible without using cash.

(v) Since demand deposits are accepted widely as a means of payment, along with currency, they constitute money in the modern economy.

 

Q12 State three disadvantages of the barter system.

 

Ans (i) In a barter system, double coincidence of wants is required. 

(ii) Here, the person is required to sell only what the other wishes to buy.

(iii) If both parties do not agree, the goods cannot be exchanged for goods. 

 

Q13 Illustrate with examples the role of ‘loan’ in ‘business’. (CBSE 2017)

 

Ans Role of Loan:

(i) Loan is a crucial element in economic life and plays a vital and positive role. 

(ii) It helps to increase earnings. Salim obtains credit to meet the working capital needs of production. The credit helps him to meet the ongoing expenses of production, complete production on time, and thereby increase his earnings. Credit therefore plays a vital and positive role in this situation.

(iii) It makes a person economically better off than before.

(iv) It helps the poor and needy at the time of crisis. 

(v) It helps the person to meet the ongoing expenses of production and complete production on time.

(vi) In another situation, because of the crop failure, loan pushes the person into a debt trap. 

 

Q14 Why are terms of credit required for a loan or credit?

 

Ans (i) Terms of credit are required so that the borrower knows the conditions to take the loan. (ii) The collateral, in the form of security or guarantee, is given to the lender until the loan is repaid.

(iii) If the borrower fails to repay the loan, the lender has all the rights to sell the assets or collateral to obtain the payment.

 

Q15 Why does the formal or informal sector ask for a collateral?

 

Ans 1. Every loan agreement specifies an interest rate which the borrower must pay to the lender along with the repayment of the principal.

  1. In addition, lenders may demand collateral or an asset that the borrower owns to use it as a guarantee until he repays the loan.
  2. Interest rate, collateral and documentation requirement and the mode of repayment are the terms of credit required for formal or informal sectors for loans. 

 

Q16 How are cooperatives functioning in the rural areas to solve the problem of credit?

 

Ans 1. Besides banks, the other major source of cheap credit in rural areas are the cooperatives. 

  1. Members of a cooperative, pool their resources for cooperation in certain areas.
  2. Cooperatives form members, who accept deposits from its members. With these deposits as collateral, the cooperative obtains a large loan from the bank. These funds are used to provide loans to members. Once these loans are repaid, another round of lending can take place.

 

Q17 Identify transactions involving money in our day-to-day life.

 

Ans There are several transactions involving money in any single day:

  1. In many of these transactions, goods are being bought and sold with the use of money. It eliminates the need for double coincidence of wants. 
  2. In some of these transactions, services are being exchanged with money.
  3. For some, there might not be any actual transfer of money taking place now but a promise to pay money later.

 

Q18 Why are transactions made in money?

 

Ans (i) A person holding money can easily exchange it for any commodity or service that he or she might want. 

(ii) Thus, everyone prefers to receive payments in money and then exchange the money for things that they want.

(iii) Take the case of a shoe manufacturer. He wants to sell shoe in the market and buy wheat. The shoe manufacturer will first exchange shoe that he has produced for money and then exchange the money for wheat. 

 

Q19 State any three advantages of an ATM.

 

Ans (i) ATM is a provision called the Automated Teller Machine.

(ii) In the case of an ATM, direct interaction with the bank is not required. 

(iii) Money can be withdrawn from the ATM during the entire twenty-four hours in a day, whereas banks close their public dealings at a particular time, binding the depositor to come within that stipulated period.

 

Q20 Explain any three loan activities of banks in India. (CBSE 2017)

 

Ans Loan activities of Banks in India:

(i) Banks use the major portion of the deposits to extend loans. 

(ii) Banks make use of the deposits to meet the loan requirements of the people.

(iii) Banks mediate between those who have surplus funds (the depositors) and those who are in need of these funds (the borrowers).

(iv) Banks charge a higher interest rate on loans than what it offers on deposits.

 

Q21 How do farmers get into debt trap?

 

Ans 1. Farmers usually take crop loans at the beginning of the season and repay the loan after harvest.

  1. Sometimes, the failure of the crop makes loan repayment impossible.
  2. So, the farmers have to sell a part of their land to repay the loan. Credit in such a condition pushes the borrowers into a situation from which recovery is painful and they get into the debt trap. 

 

Q22 Self-help Groups support has brought about a revolutionary change in the rural sector. Elaborate. (CBSE SAMPLE PAPER 2017)

 

Ans (i) The idea is to organize rural poor, in particular women, into small Self Help Groups (SHGs) and pool their savings. Members can take small loans from the group itself to meet their needs. The group charges interest on these loans but this is still less than what the moneylender charges. 

(ii) If the group is regular in savings, it becomes eligible for availing loan from the bank. Loan is sanctioned in the name of the group and is meant to create self-employment opportunities for the members. The SHG is responsible for repayment of the loan, hence, banks get ready to give loans without collateral. 

(iii) Self-help, self-reliance and creating a support system and platform to discuss and act on a variety of social issues such as health, nutrition, domestic violence etc.

 

Q23 Why do banks and cooperative societies need to lend more? Explain. (CBSE SAMPLE PAPER 2019-20) 

 

Ans Banks and cooperative societies need to lend more because:

  1. This would lead to higher incomes.
  2. People could borrow cheaply for a variety of needs.
  3. They could grow crops and set up small-scale industries etc.
  4. Cheap and affordable credit is crucial for the country’s development.
  5. To save and reduce the dependence on informal sources of credit
  6. It is important that the formal credit is distributed more equally so that the poor can benefit from the cheaper loans.

 

Q24 Dhananjay is a government employee and belongs to a rich household whereas Raju is a construction worker and comes from a poor rural household. Both are in need and wish to take loans. Create a list of arguments explaining who between the two would successfully be able to arrange money from a formal source. Why? (CBSE SAMPLE PAPER 2016)

 

Ans Dhananjay will be able to get a loan from a formal source.

Arguments:

  1. Banks are not present everywhere in rural India. Even when they are present, getting a loan from a bank is much more difficult than taking a loan from informal sources.
  2. Bank loans require proper documents and collateral. Absence of collateral is one of the major reasons which prevents the poor from getting bank loans. 
  3. Informal lenders such as moneylenders, on the other hand, know the borrowers personally and hence are often willing to give a loan without collateral.

 

Q25 Explain the values which a borrower should observe for the proper use of loan taken. (CBSE 2016)

 

Ans Borrower should observe the following for the proper use of loan taken:

  1. Proper planning of both for borrowing and spending of loan amount.
  2. Use the loan for the purpose for which it has been borrowed. 
  3. Follow the terms and conditions of the credit.
  4. To develop consciousness to repay the loan on time. 

 

Q26 “The credit activities of the informal sector should be discouraged.” Support the statement with arguments. (CBSE 2016)

OR

Why are formal sources of credit preferred over the informal source of credit? Give three reasons. (CBSE SAMPLE PAPER 2018-19) 

 

Ans The credit activities of the informal sector should be discouraged because: 

(i) 85% of loans taken by the poor households in the urban areas are from informal sources.

(ii) Informal lenders charge very high interest on their loans.

(iii) There are no boundaries and restrictions.

(iv) Higher cost of borrowing means a larger part of the earnings of the borrowers is used to repay the loan.

(v) In certain cases, the high interest rate for borrowing can mean that the amount to be repaid is greater than the income of the borrower.

(vi) This could lead to increasing debt and debt trap, therefore the credit activities of the informal sector should be discouraged.

 

Q27 “Deposits with the banks are beneficial to the depositors as well as to the nation”. Examine the statement. (CBSE 2016)

 

Ans Deposits with the banks are beneficial to the depositors as well as to the nation. 

Benefits to the Depositors:

(i) Banks accept the deposits and pay interest to the depositor.

(ii) People’s money is safe with the banks. 

(iii) People can withdraw the money as and when they require.

Benefits to the Nation:

(i) Banks use money from the depositor to afford loans. 

(ii) There is a huge demand for loans for various economic activities.

(iii) Banks mediate between those who have surplus funds and those who are in need of these funds. Thus it helps in the economic development of the nation.

 

Q28 ‘Credit has its own unique role for development.’ Justify the statement with arguments. (CBSE 2016) 

OR

Why is credit a crucial element in economic development? (CBSE SAMPLE PAPER 2018-19) 

OR

Describe the vital and positive role of credit. (CBSE 2016)

 

Ans  “Credit has its own unique role for development” 

(i) Credit helps to increase earning and therefore the person is better off than before. For example, as in (Salim’s case) 

(ii) Credit helps to earn money as well as capital for the future.

(iii) Credit helps in the development of infrastructure of the society that leads to the overall development.

 

Q29 How is money transferred from one bank account to another bank account? Explain with one example. (CBSE 2016)

 

Ans Money Transfer from one bank account to another bank account: 

  1. If a person has to make a payment to his or her friend and writes a cheque for a specific amount, this means that the person instructs his bank to pay this amount to his friend. 
  2. His friend takes this cheque and deposits it in his account in the bank. 
  3. This said amount is transferred from one bank account to another bank account.

 

Q30 How is the concept of Self Help Groups important for poor people? Give your view point. (CBSE 2016)

OR

Imagine yourself to be XYZ, a member of a women Self- Help Group. Analyse the ways through which your group provides loans to the members. (CBSE SAMPLE PAPER 2020-21) 

 

Ans (i) SHGS help in pooling the savings of the members, who are poor people.

(ii) Members can get timely loans for a variety of purposes. 

(iii) They get loans at a reasonable rate of interest.

(iv) It helps borrowers to overcome the problem of lack of collateral and documentation. 

(v) It saves them from exploitation of the money lenders.

(vi) This interest income becomes an extra source of income of the members.

 

 
 

4 MARK QUESTIONS

 

Q1 In India, about 80 percent of farmers are small farmers, who need credit for cultivation. (NCERT QUESTION)

 

(a) Why might banks be unwilling to lend to small farmers? 

 

Ans Banks require proper documentations and collateral as security against providing loans. But there are situations where small farmers lack in providing such documentation and collateral and even fail to repay the loan in time due to crop failure. Therefore, the banks would not prefer to lend money to small farmers.

 

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

 

Ans Apart from banks, the small farmers can borrow from local money lenders, agricultural traders, big landlords, cooperatives, SHGs, etc.

 

(c) Explain with an example how the terms of credit can be unfavourable for the small farmer.

 

Ans Example – Gopal is a small farmer, who borrowed money from a local moneylender at a high interest rate of 3 per cent to grow rice. But the crop was hit by drought resulting in failure. As a result, Gopal had to sell a part of his land to repay the loan. 

 

(d) Suggest some ways by which small farmers can get cheap credit.

 

Ans The small farmers can get cheap credit from the different sources like – Banks, Agricultural Cooperatives, and SHGs.

 

Q2 Read the given paragraph and answer the following questions:

 

Modern forms of money include currency paper notes and – coins. Unlike the things that were used as money earlier, modern currency is not made of precious metal such as gold, silver and copper. And unlike grain and cattle, they are neither of everyday use. The modern currency is without any use of its own. Then, why is it accepted as a medium of exchange? It is accepted as a medium of exchange because the currency is authorized by the government of the country. In India, the Reserve Bank of India issues currency notes on behalf of the central government. 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.

 

  1. Modern forms of money include ___________
  2. Gold, silver and copper. 
  3. Stone punch mark coins.
  4. Paper notes and coins
  5. None of the above

 

Ans c. Paper notes and coins

 

  1. Why is modern currency accepted as a medium of exchange?
  2. Because it is used by everyone
  3. Because it is authorised by the government of the country
  4. Because making modern currency is very easy
  5. All of the above

 

Ans b. Because it is authorised by the government of the country

 

  1. Give an example of modern forms of money
  2. Demand draft
  3. Deposit form
  4. ATM Card
  5. All of the above

 

Ans d. All of the above

 

  1. Which among the following banks issues currency notes on behalf of the Central government in India?
  2. RBI
  3. State Bank of India
  4. Bank of India
  5. Central bank of India

 

Ans a. RBI

 

Q3 Read the given paragraph and answer the following questions:

 

In recent years, people have tried out some newer ways of providing loans to the poor. The idea is to organise rural poor, in particular women, into small Self Help Groups (SHGs) and pool (collect) their savings. A typical SHG has 15-20 members, usually belonging to one neighbourhood, who meet and save regularly. Saving per member varies from25 to 100 or more depending on the ability of the people to save. Members can take small loans from the group itself to meet their needs. The group charges interest on these loans but this is still less than what the moneylender charges. After a year or two, if the group is regular in savings, it becomes eligible for availing loan from the bank. Loan is sanctioned in the name; of the group and is meant to create self-employment opportunities for the members. For instance, small loans are provided to the members for releasing mortgaged land, for meeting working capital needs (e.g. buying seeds, fertilisers, raw materials like bamboo and cloth), for housing materials, for acquiring assets like sewing machine, handlooms, cattle, etc.

 

  1. In Self Help Groups, __________ decide the savings and loan activity option. 

(a) Reserve Bank of India 

(b) Members 

(c) Co-operatives 

(d) Rural Banks

 

Ans (b) Members

 

  1. Why Self Help Groups (SHG) are growing in popularity? With reference to the above context, infer the appropriate option. 

(a) As they provide loans at a nominal rate of interest. 

(b) They create self-employment opportunities for its members. 

(c) Both (a) and (b) 

(d) As members of SHG’s require collateral to get loans.

 

Ans (c) Both (a) and (b)

 

  1. 85% of the loans taken by the poor households in the rural areas are from which of the following sources? Identify the source from the given options. 

(a) Cooperatives 

(b) Government Bank 

(c) Informal Sources 

(d) Local bank

 

Ans (c) Informal Sources 

 

  1. Which of the following aspects is correct regarding the Self Help Groups? Identify the correct option. 

(a) They have mainly encouraged rural women to obtain credit. 

(b) They have helped women to become self-reliant. 

(c) They have helped women to discuss relevant issues like health. 

(d) All of the above

 

Ans (d) All of the above

 

 
 

5 MARK QUESTIONS

 

Q1 In situations with high risks, credit might create further problems for the borrower. Explain. (NCERT QUESTION)

 

Ans 1. Another term for this state would be ‘debt-trap’. 

  1. Whenever a person takes credit, it involves an interest rate on the loan and if it is not paid back, then the borrower is forced to give up his collateral or asset which he/she used as the guarantee, to the lender. 
  2. For example, credit taken by farmers for cultivation could create problems at some time. Basically, crop production involves high costs on inputs such as HYV seeds, fertilizers, pesticides, irrigation, etc. Mainly the loan is taken by a farmer at the beginning of the season and it is repaid after the harvest. But in some cases, failure of the crop results in impossible loan payment conditions. Then, in order to repay the loan sometimes, they become bound to sell part of their lands, making their situation worse than before. 
  3. There are cases in India, where non repayment of loans leads to farmer’s suicides, example, Maharashtra. 
  4. Thus, it depends on various factors to conclude whether a credit is useful or not.

 

Q2  What is the basic idea behind the SHGS for the poor? Explain in your own words. (NCERT QUESTION)

 

Ans 1. SHG’s basic idea is to provide financial resources for the poor through organising the rural poor, especially women, into small Self Help Groups. 

  1. They are also responsible for providing timely loans at a reasonable interest rate without collateral.
  2. There are some main objectives of SHGs, which are as followed
  1. It organises the rural poor, especially women, into small Self Help Groups.
  2. It collects saving of the members. 
  3. It provides loans without collateral.
  4. It provides timely loans for various purposes. 
  5. It provides loans at a reasonable rate of interest and on easy terms.
  6. It also provides a platform to discuss and act on a variety of social issues such as education, health, nutrition, domestic violence, etc.

 

Q3 What are the reasons why the banks might not be willing to lend to certain borrowers? (NCERT QUESTION)

 

Ans The Banks might not be willing to lend certain borrowers due to the following reasons:

  1. Banks require proper and legal documents and collateral as security against loans. 
  2. The borrowers who have not repaid previous loans, the banks might not be willing to lend them further.
  3. Those entrepreneurs, who are going to invest in a business with high risks, the banks might not be willing to lend money.
  4. One of the main objectives of a bank is to earn more profits after meeting a number of expenses. 
  5. For this purpose, it has to adopt judicious loan and investment policies which ensure fair and stable return on the funds.

 

Q4 Analyse the role of credit for development. (NCERT QUESTION)

 

Ans 1. Credit plays a crucial role in a country’s development. 

  1. Banks provide a necessary aid for improvement by sanctioning loans to the developing industries and trade. It results in increased production, profits and employment. 
  2. Nevertheless, caution must be exercised in the case of high risks so that losses do not occur.
  3. This advantage of loans also needs to be manipulated and kept under an administrative hold because loans from the informal sector include high interest rates that may be more harmful than good. 
  4. For this reason, it is important that the formal sector gives out more loans so that borrowers are not duped by moneylenders and can ultimately contribute to national development.

 

Q5 Review any three merits and any two demerits of ‘formal sector of credit’ in India. (CBSE 2016)

 

Ans Merits of Formal Sectors of Credit:

(i) Helps to meet the working capital needs of production. 

(ii) Helps in ongoing expenses of production.

(iii) Helps in completing production on time,

(iv) Helps in increasing earnings.

(v) Low interest rates.

(vi) Easy access of loans to small cultivators and small scale industries.

 

Demerits of Formal Sectors of Credit:

(i) Difficulty in obtaining loans

(ii) Collateral issues.

(iii) Documentation could be a problematic issue for few.

(iv) Lack of credibility in rural areas.

 

Q6 Why are poor/rural households still dependent on informal sources of credit? (CBSE SAMPLE PAPER 2022-23)

OR

“Poor households still depend on informal sources of credit.” Support the statement with examples. (CBSE 2016)

 

Ans Reasons:

  1. Banks are not present everywhere in rural India.
  2. Even if they are present, getting a loan from a bank is much more difficult than taking a loan from informal sources.
  3. Bank loans require proper documents and a collateral. Absence of collateral is one of the major reasons which prevents the poor from getting bank loans.
  4. Informal lenders like moneylenders know the borrower personally and hence, are often willing to give a loan without a collateral. 
  5. The borrowers can, if necessary, approach the moneylender even without repaying their earlier loans.
  6. However, the moneylenders charge very high rates of interest, keep no records transactions and harass the poor borrowers.

 

Q7 What are the advantages of SHGs?

 

Ans Advantages of SHGS:

(i) The SHGS help the borrower to overcome the problem of lack of collateral.

(ii) They can get timely loans for a variety of purposes and at a reasonable interest rate.

(iii) SHGs are the building blocks of organisation of the rural poor.

(iv) Not only do they help women 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.

 

Q8 What are the differences between formal and informal sources of credit?

 

Ans Formal sources: 

(i) These sources of credit are registered by the government and have to follow its rules and regulations.

(ii) RBI supervises the functioning of formal sources of credit. 

(iii) They generally charge lower rates of interest.

(iv) Their main motive is social welfare.

Example: Banks and cooperatives. 

 

Informal sources:

(i) These include those small and scattered units which are largely outside the control of the

government. 

(ii) There is no organisation which supervises the credit activities.

(iii) They charge much higher rates of interest. 

(iv) Their main motive is profit-making.

Example: Moneylenders, traders, employees, relatives and friends, etc.

 

Q9 What is a cheque? How does it replace currency?

 

Ans (i) 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 drawn.

(ii) The facility of cheque against demand deposits makes it possible to directly settle the payments without the use of withdrawal. 

(iii) For payment through cheque, the payer who has an account with the bank, makes out a cheque of a specific amount. 

(iv) The money is transferred from one bank account to another in a couple of days. The transaction is complete without any payment of cash.

 

Q10 What is credit? How can credit be both an asset as well as a debt trap?

 

Ans Credit refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payment. 

(i) Example of credit as an asset: During the festival season, a shoe manufacturer has received an order of making shoes in bulk, within a month’s time. To complete production, he hired some extra workers and had to purchase the raw materials. He asks the supplier to supply leather now and promises to pay him later. Then he took some advance payment from the trader. By the end of the month, he is able to deliver the order, make a good profit and repay the money he had borrowed.

(ii) Example of credit as debt trap: A farmer picks up the loan from a moneylender to meet the expenses of cultivation. But unfortunately the crop is hit by the pests and fails. So, he is unable to repay the loan and debt grows larger with interest. Next year, he picks up a fresh loan and is able to have a normal crop that year. But earnings are not enough to pay the earlier debt. So, he is caught in a debt trap. He can repay the loan, only after selling a part of the land.

In shoemaker’s case, credit plays a vital and positive role, whereas in farmer’s case credit pushes the borrower into a situation from which recovery is very painful.

 

Q11 What are the terms of credit?

 

Ans (i) Every loan agreement specifies an interest rate which the borrower must pay to the lender along with repayment of the principal.

(ii) In addition, the lender may demand collateral, Le, an asset that the borrower owns and uses this as a guarantee until the loan is repaid. 

(iii) If the borrower fails to repay the loan, the lender has the right to sell the collateral to obtain payment.

(iv) Terms of credit comprise interest rate, collateral and documentation requirement, and the mode of repayment.

(v) The terms of credit vary substantially from one credit arrangement to another. They may vary depending on the nature of the lender and the borrower.

 

Q12 “The rich households are availing cheap credit from formal lenders whereas the poor households have to pay a heavy price for borrowing.” Comment.

 

Ans 1. The formal sector still meets only about half of the total credit needs of the rural people.

  1. The remaining credit needs are met from informal sources.
  2. Most loans from informal lenders carry a very high interest rate and do little to increase the income of the borrowers.
  3. Thus, it is necessary that banks and cooperatives increase their lending particularly in the rural areas, so that the dependence on informal sources of credit reduces. 
  4. While formal sector loans need to expand, it is also necessary that everyone receives these loans.
  5. At present, it is the rich households who receive formal credit whereas the poor have to depend on informal sources.

 

Q13 Who takes the important decisions of SHGs and why?

OR

‘Self Help Groups’ help borrowers to overcome the problem of lack of collateral.” Examine  the statement. (CBSE 2016)

 

Ans 1. Most of the important decisions regarding the savings and loan activities are taken by the group members. 

  1. The group decides as regards the loans to be granted-the purpose, amount, interest to be charged, repayment schedule, etc.
  2. It is the group which is responsible for the repayment of the loan.
  3. In case of default by any one member, it is followed up seriously by other members in the group.
  4. Because of this feature, banks are willing to lend to the poor women when organised in SHGs even though they have no collateral as such.

 

Q14 Write a note on the success story of ‘Grameen Bank of Bangladesh’.

 

Ans 1. Grameen Bank of Bangladesh was founded by Prof. Muhammad Yunus (a recipient of Nobel Peace Prize for the year 2006) in year 1970. 

  1. Over the last 42 years i.e., from 1976 to 2017, the operations of the bank spread to a large area of Bangladesh. The bank was started with a very small project and in 2005, it spread across 40,000 villages with 6 million borrowers in various parts of Bangladesh. 
  2. Most of the borrowers of this bank are women and belong to poor sections of society. 
  3. These poor women have started ‘self-employment’ projects by taking credit from this grameen bank. 
  4. This credit has a positive impact on these women as they started gainful employment, which helped them not only to repay their loan but also to earn a good living for themselves and their family.

 

Q15 How can the formal sector loans be made beneficial for poor farmers and workers? Suggest any five measures. (CBSE 2016)

 

Ans Formal sector loans can be made beneficial for poor farmers and workers in the following ways: 

(i) It is required to create awareness among farmers about formal sector loans. 

(ii) Process of providing loans should be made easier.

(iii) It should be simple, fast and timely.

(iv) More number of Nationalised banks/comparative banks should be agreed in the rural sector. (v) Banks and cooperatives should increase the facility of providing loans so that dependence on informal sources of credit reduces.

(vi) The benefits of loans should be extended to poor farmers and small scale Industries. 

(vii) While formal sector loans need to expand, it is also necessary that everyone receives these loans.

 

Q16 How are deposits with the bank beneficial for individuals as well as for the nation? Explain with examples.

 

Ans 1. Banks accept deposits and also pay an interest rate on the deposits. 

  1. In this way, people’s money is safe with the banks and it earns an interest as well.
  2. People also have the provision to withdraw the money as and when they require.
  3. Banks keep only a small portion of their deposits as cash. Then they use the major portion of the deposits to extend loans.
  4. There is a huge demand for loans for various economic activities. Banks make use of the deposits to meet the loan requirements of the people.
  5. This creates employment and income to the people of a nation and contributes to national development.

 

Q17 “Focuses of currency have undergone several changes since early times.” Elucidate.

 

Ans 1. Before the introduction of coins, a variety of objects were used as money.

  1. For example, since the very early ages, Indians used grains and cattle as money. 
  2. Thereafter, it caused the use of metallic coins-gold, silver, copper coins, a phase which continued well into the last century.
  3. Modern forms of money include currency-paper notes and coins.
  4. Modern currency is not made of precious metal, it is without any use of its own.

 

Q18 Why is it necessary that banks and co-operatives increase their lending in rural areas? Explain. (CBSE 2016)

 

Ans Banks and cooperatives should increase their lending in rural areas:

  1. Formal sector charges a low rate of interest.
  2. Lack of formal sources of credit in villages.
  3. Villagers mainly depend on the informal sector.
  4. They charge a high rate of interest. 
  5. Borrowers come under debt trap.
  6. Therefore there is a need to expand formal sectors so that everyone receives these loans.

 

Q19 How do formal and informal sources of credit differ from each other?

 

Ans Difference between formal and informal sources of credit:

Formal Sector LoansInformal Sector Loans
1. Comparatively the rate of interest charge is lower.1. Higher rate of interest is charged.
2. Collateral is must for getting a loan from a formal sector. 2. They are ready to give loans without any collateral too.
3. RBI supervises them.3. There is no organisation to supervise them.
4. Rich urban households depend on the formal sector.4. Poor households depend on the informal sector.
5. Example: Banks and Cooperatives.5. Example: Moneylender, traders, friends, retailers, etc.
6. Organised banking sector is systematic in its functioning.6. Unorganised sector is not so systematic and often indulges in malpractices to exploit the customers.
7. Organised financial intermediaries maintain proper books of accounts. Their books of accounts are regularly audited. Their functioning is more transparent.7. Unorganised financial intermediaries do not maintain proper books of accounts. They do not charge uniform interest rates. They keep their business affairs confidential.
8. Formal credit sector usually grants loans for productive purposes like purchase of machinery, agricultural equipment, house, etc.8. Informal credit sector usually does not differentiate between loans for productive and unproductive purposes. They easily give loans even for unproductive purposes like loans for family function, for illness, etc.
9. Here, more documentation is required. It involves many formalities.9. It involves less documentation. It involves less formalities. That is why illiterate persons prefer to take loans from this sector.

 

Q20 How does RBI supervise banks? 

 

Ans Reserve Bank of India supervises banks by laying guidelines and norms for the banks:

(i) RBI requires commercial banks to keep a certain percentage of their deposits in cash and other liquid assets. This percentage is called statutory liquidity ratio (at present this ratio is 25 percent). After keeping a part of deposits in cash and other liquid assets, banks can use their surplus funds to give loans. The objective is to ensure that banks can meet the withdrawal requirements of deposit holders.

(ii) RBI also requires commercial banks to deposit a certain percentage of their deposits with RBI in cash. This percentage is called cash reserve ratio (at present this ratio is 5.5 per cent).

(iii) RBI issues guidelines for fixing rate of interest on borrowings and lending by commercial banks.

(iv) RBI directs the commercial banks to give a certain percentage of loans to priority sectors (agriculture, small-scale industries, self-help groups, etc.).