03 : Money And Credite

Demonetisation : In India on 8 November 2016 currency notes of Rs 500 and Rs 1,000 were declared invalid. People were asked to surrender these notes to the bank by a specific period and receive new Rs. 500, Rs. 2,000 or other currency notes. This is known as ‘demonetisation’.

Digital transactions : Transactions done through internet or mobile phone, cheque, ATM card, credit card and Point of Sale (POS) swipe machine are called digital transactions.

Double coincidence of wants : The exchange of goods with commodity is known as double coincidence of wants.

It refers to a situation in the barter system wherein both parties agree to buy and sell each other's commodities.

In double coincidence of wants is both the parties (seller and the buyer) have to agree to buy and sell each other’s commodities.

The double coincidence of wants is the main difficulty of Barter System

Money eliminate the need for double coincidence of wants.

Barter system : A system where goods are directly exchanged without the use of money is called barter system.

Money : Anything which is accepted as a medium of exchange is called money.

Money is beneficial in transactions because money eliminates the need for double coincidence of wants.

Money acts as an intermediate in the exchange process, it is called a medium of exchange.

A person holding money can easily exchange it with any commodity or service that he desires.

Everyone prefer to receive payments in money and then exchange the money for articles that they desires.

Money transaction system is far better than the barter system.

Mordern forms of money

Currency
Currency is the form of money-paper notes and coins.

Paper notes and coins are the two forms of modern currency

Modern currency – Paper notes/coins,

Old currency – metallic coins like gold, silver & copper coins.

The modern currency is without any use of its own.
It is accepted as a medium of exchange because the currency is authorised 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 organisation is allowed to issue currency.

Law legalises 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.

RBI : It is the centeral bank of india which control the monitary policy of our country.

The RBI issues currency notes on behalf of the central govt.

It also control and superwise all the commecial bank in india.

The RBI monitors the banks in maintaining cash balance.

The RBI monitors the banks loans distribution and interest rate.

The Reserve Bank of India supervises the functioning of formal sources of loans.

Deposits with Banks

People deposit extra cash in the banks. Banks accept the deposits and also pay an amount as interest on the deposits.
Advantages of depositing money in the banks.

It is the safer place to keep money as compared to the house.
People can earn interest on the deposited money.

People can withdraw the money when they require.
People can also make payment through cheque

Demand deposits : The deposits in the bank accounts can be withdrawn on demand are called demand deposits.

Demand deposits make it possible to directly settle payments without the use of cash.

Demand deposits offer another facility payment through cheque.
Cheque : A cheque is a paper instructing the bank to pay a specific amount from a person’s account to the person in whose name the cheque has been issued.

The cheque is modren form of money.
The cheque facility makes direct payment possible without the use of cash.

Loan activities of banks
The banks maintain a minimum cash balance out of the deposits they receive.
Banks keep only a small proportion (15 %) of their deposits as cash deposits. This is kept to pay the depositors who might come to withdraw money from the bank on any given day. Since, on any particular day, only some of its many depositors come to withdraw cash, the bank is able to manage with this cash.

There is a huge demand for loans for various economic activities.
Banks use the major portion of the deposits to extend loans. In this way, banks mediate between those who have surplus funds (the depositors) and those who are in need of these funds (the borrowers).
Banks charge a higher interest rate on loans than the offered on deposits.
The difference between what is charged from borrowers and what is paid to depositors is their main source of income.

Credit : The activity of borrowing and lending money between two parties.
Credit (loan) is an agreement in which the lender supplies the borrower money in return for the promise of future payment.

Debt-trap : Credit pushes the borrower into a situation from which recovery is very painful. This situation called debt trap
Terms of credit
Interest rate : Every loan agreement specifies an interest rate which the borrower must pay to the lender along with the repayment of the principal
Collateral (security) : Lenders may demand collateral (security) against loans
documentation requirement
Mode of repayment
Collateral : It is an asset that the borrower have (such as land, building, vehicle, livestocks, deposits with banks) and this as a guarantee to a lender until the loan is repaid.

Formal credit : Loan Provided by institutions under the direct supervision of RBI is called formal credit.
The formal lenders include loans from banks and cooperatives.
The Reserve Bank of India supervises the functioning of formal sources of loans.

The RBI ensures that the banks give loans not just to profit-making businesses and traders but also to small cultivators, small scale industries, to small borrowers.

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

Loans from Cooperatives
The cooperatives provides cheap credit in rural areas
There are several types of cooperatives possible such as farmers cooperatives, weavers cooperatives, industrial workers cooperatives, etc.
For Example
Krishak Cooperative functions in a village not very far away from Sonpur. It has 2300 farmers as members. It accepts deposits from its members. With these deposits as collateral, the Cooperative has obtained 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. Krishak Cooperative provides loans for the purchase of agricultural implements, loans for cultivation and agricultural trade, fishery loans, loans for construction of houses and for a variety of other expenses.
Informal credit :
Loan Provided by idividual under no supervision is called Informal credit
The informal lenders include moneylenders, traders, employers, relatives and friends, etc.
There is no organisation which supervises the credit activities of lenders in the informal sector.
There is no one to stop them from using unfair means to get their money back.
They give loans at the interest rate of their choice.
Compared to the formal lenders, informal lenders charge a much higher interest on loans. Thus the cost of borrowing increases
Due to higher interest rate (higher cost of borrowing) a larger part of the earnings of the borrowers is used to repay the loan.
Many times the amount to be repaid is greater than the income of the borrower. This increases debt and debt trap.
People who want to start an enterprise by borrowing, may do not so due to the high cost of borrowing.

Poor households still depend on informal sources of credit because :
Banks are not present everywhere in rural India.
Getting a loan from a bank is much more difficult than Getting a loan from informal sources.
Bank loans require proper documents and collateral while Informal lenders know the borrowers personally and hence are give a loan without collateral.

Self -Help group

Self help groups are the organization of the rural poor (in particular women) which promote small savings among their members.

“Self-Help Groups” the building blocks of the rural poor

A SHG has 15-20 members, which are usually neighbour, they meet and save regularly.

Self Help groups help rural poor to collect their savings.

SHGs provide small loans at reasonable interest rates to its members for their needs

They help women to become financially self-reliant

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 selfemployment opportunities for the members.

Small loans are provided to the members for releasing mortgaged land, for housing materials, for sewing machine, handlooms, cattle, etc.

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

Self Help Group is also responsible for the repayment of the loan.

Any case of non repayment of loan by any one member is followed up seriously by other members in the group.

Due to this feature, banks are willing to lend to the poor women when organised in SHGS, even though they have no collateral as such.

Thus, the SHGs help borrowers overcome the problem of lack of collateral.

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.

Grameen Bank of Bangladesh
“If credit can be made available to the poor people on terms and conditions that are appropriate and reasonable these millions of small people with their millions of small pursuits can add up to create the biggest development wonder.” Professor Muhammad Yunus, the founder of Grameen Bank, and recipient of 2006 Nobel Prize for Peace
Grameen Bank of Bangladesh is playing an important role in providing credit to the poor at reasonable rates.

What is the exchange of goods for goods called?
Double coincidence of wants
What is the main difficulty of Barter System ?
The double coincidence of wants.
Which mediums of exchange is convenient ?
Money
Explain the meaning of ‘Currency’.
Currency is the form of money-paper notes and coins.
Who legalises the use of rupee as a medium of payment for settling transactions in India?
The Indian law.
What are the two forms of modern currency
Paper notes and coins.
Who supervises the functioning of formal sources of loans ?
Reserve Bank of India (RBI)
Who does issues currency noteson behalf of the Central Government ?
Reserve Bank of India.
Give any one example of the methods to make payment without using cash.
On line transfer/ by cheque.
Give one example of money which is not in the form of currency (cash).
By cheque
How much cash do the bank have with its total cash amount?
15%
How do the Demand Deposits offer facilities ?
It offers essential characteristics of money/Safe transfer of money.
Who provides assured payment ?
Demand Deposit
Why do banks or Lenders demand collateral against loans.
Or Explain the importance of ‘Collateral’
It is used as a guarantee to a lender until the loan is repaid.
Explain the importance of formal sector loans in India:
Low interest rate.
Give any two examples of informal sector of credit.?
The two informal sectors of credit are: (i) Moneylenders (ii) Traders
Give any two examples of formal sector of credit.?
The two formal sectors of credit are: (i) Banks (ii) cooperatives
Why are most of the poor households are deprived from the formal sector of loans.
Due to lack of collateral
What things can be used as collateral ?
Land, building, jewellery, vehicle, livestock, deposits with banks etc.
What is full form of SHG ?
Self Help Group.
Who among the following takes the decision regarding saving and loan activities in the Self Help Groups (SHGs) ?
Members of Self-Helf Group (SHG)
What is “double coincidence of wants'?
It refers to a situation in the barter system wherein both parties agree to buy and sell each other's commodities.
How does money eliminate the need for double coincidence of wants ?
If you have money in your pocket you can purchase any thing at any time as you wish.
What is barter system?
A system where goods are directly exchanged without the use of money is called barter system.
Why is money accepted as a medium of exchange ?
Or Why is money called a medium of exchange ?
The money is called/accepted as a medium of exchange because it acts as an intermediate in the exchange process.
How is money beneficial in transactions.
Money eliminates the need for double coincidence of wants.
Money act as a medium of exchange.
Highlight the inherent problem, in double coincidence of wants. ?
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.
How is Double coincidence of wants not appreciable in the contemporary scenario?
Double coincidence of wants not appreciable because what a person desires to sell is exactly not what the other wishes to buy.
Give one example each of modern currency and older currency
Modern currency – Paper notes/coins,
Old currency – metallic coins like gold, silver & copper coins.
Why are demand deposits considered as money ?
Demand deposits are considered as money because they are accepted widely as a means of payment along with currency.
What is a cheque?
A cheque is a paper instructing the bank to pay a specific amount from a person’s account to the person in whose name the cheque has been issued.
Define credit.
Credit is an agreement between the lender and the borrower in which the borrower promises to pay the lender in the future.
Explain the main source of income of banks.
Banks charge a higher rate of interest on loans than what they offer on deposits. The difference between these two is the main source of income of banks
Why is the supervision of the functioning of formal sources of loans is necessary
The supervision of the functioning of formal sources of loans is necessary to check how much banks are lending, to whom and at what interest rate.
Why one cannot refuse a payment made in rupees in India?
One cannot refuse a payment made in rupees in India because it is authorised by the government of India and the Law legalises the use of rupee as a medium of exchange.
How does money act as a medium of exchange ?
Money acts as a medium of exchange as it acts as an intermediate in the exchange process and transactions. We can buy things if we have money in our pockets.
Give any one example of the methods to make payment without using cash.
Use debit card to book movie tickets, or use online transfer through payment apps to purchase bread and milk from grocery shop is one example of cashless transaction
What is collateral ?
Collateral is an asset that the borrower have (such as land, building, vehicle, livestocks, deposits with banks) and this as a guarantee to a lender until the loan is repaid.
How do the deposits with the banks become their source of income ?
Banks charge high interest rate on loans than interest on deposits. So The difference between the interest charged from borrowers and the interest paid to depositors is their main source of income
Why is it necessary to increase a large number of banks mainly in rural areas ? Explain.
Increase large number of banks:
(i) To reduce the dependence on informal sector of credit
(ii) To provide cheaper loans.
(iii)To provide accessibility towards loans for the poor
How do double coincidence of wants arises?
(i) When two parties have to agree to sell and buy each other‘s commodities, double coincidence of wants arise.
(ii) In a Barter System where goods are directly exchanged without the use of money, there double coincidence of wants is an essential feature.
What are the limitations of barter system ?
Lack of double coincidence of wants
Lack of a common measure of value.
Problem of store of value.
Lack of divisibility.
What are the function of money ?
Money acts as a medium of exchange.
Money have solved the problem of bartery system.
Money Serves as a measure of value.
Money acts as an intermediate in the exchange process
Why are transactions made in money ? Explain.
(i) Money is accepted as a medium of exchange in all transactions
(ii) Money transaction system is far better than the barter system.
(iii) Money eliminate the need for double coincidence of wants.
(iv) A person holding money can easily exchange with goods/ services.
Describe any three advantages of ‘Self Help Groups’
(i) SHGs provide timely loans at reasonable interest rates for various purposes.
(ii) SHGs help borrowers to overcome the problem of lack of collateral.
(iii) They prevent poor from harassment of the money lenders and landlords.
(iv) The SHGs help borrowers to overcome the problem of lack of collaterals
What are the advantages of depositing money in the banks ?
It is the safer place to keep money as compared to the house.
People can earn interest on the deposited money.
People have the provision to withdraw the money when they required.
People can also make payment through cheque.
“Banks are efficient medium of exchange.” Support the statement with arguments.
(i) The deposits in the bank accounts can be withdrawn on demand by demand deposits.
(ii) The cheque facility makes direct payment possible without the use of cash.
(iii) Demand deposits offer another facility payment through cheque.
Why do lenders ask for ‘collateral’ while lending ? Analyse the reasons.
(i) It acts as a security against loans.
(ii) Lenders use it as guarantee to lender 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.
Why is collateral a main reason to prevent the poor getting a loan from banks
(i) Absence of collateral with the poor.
(ii) Absence of documents with them.
(iii) The savings of rural poor is negligible..
(iv) Lack of education and awareness among them.
Why is it a main reason to prevent the poor getting a loan from banks? Explain.
Collateral is a main reason to prevent the poor getting a loan from banks
Collateral uses this as a guarantee to lenders until the loans are repaid. Property such as land, deposits with banks, livestock are some examples of collateral used for borrowing.
Describe the importance of formal sources of credit in the Economic Development:
(i) Formal sources provide cheap credit .
(ii) Formal sources provide credit at affordable rate.
(iii) Formal sources of credit are regulated by the government
(iv) Credit from formal source are favourable.
Explain the role of credit for economic development
(I) Credit is required by all the three sectors of the economy.
(ii) Credit helps to meet the working capital need of production.
(iii) It helps to meet the ongoing expenses of production.
(iv) It helps to increase earnings.
Examine any three situations in which credit pushes the borrower into a debt-trap.
(i) Loans from informal sector could lead to debt trap.
(ii) Lack of planning results in debt.
(iii) Difficulty in repaying loans due to certain circumstances.
(iv) Higher interest rate.
Explain any three loan activities of banks in India.
(i) Banks use the major portion of the deposits to extend loans.
(ii) Banks mediate between those who have surplus funds (the depositors) and those who are in need of these funds (the borrowers).
(iii) Banks charge a higher interest rate on loans than what it offers on deposits.
Describe the utility of Cheque.
(i) Cheques have the features of money.
(ii) They settle payments without the use of cash.
(iii) They are widely accepted as a means of payment.
(iv) Checks reduce the risk in transactions.
(v) It is the most suitable medium of fair and transparent transactions.
Why are service conditions of formal sector loans better than informal
sector ? Explain.
(i) Formal sector charge low interest rate on credit than informal sector
(ii) Formal sources have more transparency than the informal sector
(iii) Formal sector are supervised by the Reserve Bank of India on the functioning.
(iv) The formal sector does not use unfair means to get money back.
“The credit activities of the informal sector should be discouraged.” Support the statement with arguments
(i) Informal lenders charge a much higher interest on loans. Thus the cost of borrowing increases
(ii) The poor households have to pay a large amount for borrowing
(iii) 85% of the loans taken by poor households in the urban areas are from informal sources.
Examine any three situations in which credit helps in the development of agriculturists.
(i) The credit helps to meet the ongoing expenses of production.
(ii) It helps in purchasing fertilisers, hybrid seeds and farm equipment.
(iii) It helps in ifnancing irrigation requirements and storage of production.
(iv) The credit helps in modernising agricultural.
(v) It helps in increasing the earnings of farmers.
Explain the reason for necessity of supervision by the Reserve Bank of India of formal sources of loans.
(i) The RBI monitors the banks in maintaining the cash balance.
(ii) RBI ensures that the banks give loans not just to a profit-making
business and trades but also to small cultivators and small-scale industries and farmers also.
(iii) RBI supervises that how much banks are lending to whom and on what interest rates.
Differentiate between formal and informal sources of Credit/loans.
Or How does the credit vary substantially between formal and informal lenders? Explain with examples.
(i) Sources of formal loans are banks and cooperatives.while sources of informal loans are moneylenders, traders, employers, relatives, friends
(ii) The Reserve Bank of India supervises the functioning of formal
sources of loan whereas no organisation supervises informal sector.
(iii) Formal sources charge nominal rate of interest while Informal
lenders charge a much higher interest on loans.
(iv) Mostly urban households are availing credit from formal lenders
whereas the rural households avail credit from informal lenders.
(v) Collateral is an essential condition to get loans in the formal sector
while it is not essential in the informal sector.
‘‘Credit can play a positive role.’’ Justify the statement with arguments.
Credit plays a positive role when the borrower is able to return the loan amount on time
Credit helps to meet the working capital need of production.
Credit helps to meet the ongoing expenses of production.
Credit helps to increase earnings and therefore the person is better off than before.
Credit therefore plays a vital and positive role in this situation.
Self-Help Groups are the building blocks of organisation of the rural poor. Suggest any three ways to make them popular for social issues.
(i) SHGs provide small loans at reasonable interest rates to its members for their needs
(ii) The SHGs help borrowers overcome the problem of lack of collateral.
(iii) They help women to become financially self-reliant
(iv) The regular meetings of the group provide a platform to discuss and act on a variety of social issues.
Explain any three functions of the Reserve Bank of India.
Or Describe the significance of the Reserve Bank of India.
(i) The RBI issues currency notes on behalf of the central govt.
(ii) It supervises the functioning of formal sources of loans.
(iii) The RBI monitors the banks to maintain the cash balance.
(iv) The RBI ensures that the banks give not just to profit-making businesses and traders but also to small cultivators, small scale industries, to small borrowers etc.
(v) The RBI control the monitary policy of our country.
‘‘The use of money spans a very large part of our everyday life.’’ Support the statement with examples.
(i) Money is accepted as a medium of exchange in all transactions
(ii) Money is beneficial in transactions because money eliminates the need for double coincidence of wants.
(iii) Money acts as an intermediate in the exchange process.
(iv) A person holding money can easily exchange with goods/ services.
(v) Everyone prefer to receive payments in money and then exchange the money for articles that they desires.
How is Demand Deposits an essential features of money?
Or How do demand deposits have the essential features of money ? Explain
(i) The deposits in the bank accounts can be withdrawn on demand by demand deposits.
(ii) Demand deposits make it possible to directly settle payments without the use of cash.
(iii) Demand deposits offer another facility payment through cheque.
(iv) They are accepted widely as a means of payment along with currency
(iv) They constitute money in the modern economy.
Why are poor households still dependent on informal sources of loans? Explain
Or “Poor households still depend on informal sources of credit.” Support the statement with examples.
(i) Banks are not present everywhere in rural India.
(ii) Getting a loan from a bank is much more difficult than Getting a loan from informal sources.
(iii) Bank loans require proper documents and collateral while Informal lenders know the borrowers personally and hence are give a loan without collateral.
(iv) Absence of collateral is of one of the major reasons which prevent the poor from getting bank loans.
‘‘Self Help Groups (SHGs) are the building blocks of organisation of the rural poor.’’ Support the statement with examples.
Or How is the concept of Self Help Groups important for poor people ? Give your view point.
Or Asses the importance of Self- Help group for poor ?
(i) Self Help groups help rural poor to collect their savings.
(ii) SHGs provide small loans at reasonable interest rates to its members for their needs
(iii) The SHGs help borrowers overcome the problem of lack of collateral.
(iv) They prevent poor from harassment of the money lenders and landlords.
(vi) They help in creating self-employment opportunities for the members.
(vi) They help women to become financially self-reliant
Explain the functions of "Self Help Group".
(i) Self Help groups help rural poor to collect their savings.
(ii) SHGs provide small loans at reasonable interest rates to its members for their needs
(iii) They help in creating self-employment opportunities for the members.
(iv) The SHGs help borrowers overcome the problem of lack of collateral.
(v) Self Help Groups help women to become financially self-reliant
(vi) Self-Help Groups also provide a platform to discuss various social issue.
How is money transferred from one bank account to another bank account ? Explain with an example
Account holder writes a cheque to recipient.
The recipient deposit this cheque in his account in the bank.
The Bank transfers money in recipient account.
A shoe manufacturer, Salim has to make a payment to the leather supplier and writes a cheque for a specific amount, this means that Salim instructs his bank to pay this amount to the leather supplier.
The leather supplier takes this cheque and deposit in his account in the bank. The money is transferred from one bank account to another bank account.
“The Self-Help Groups help borrowers to overcome the problem of lack of collateral security.” Support the statement with examples.
In SHGs most of the important decisions regarding the savings and loan activities are taken by the group members.
Self Help Group is also responsible for the repayment of the loan.
Any case of non repayment of loan by any one member is followed up seriously by other members in the group.
Due to this feature, banks are willing to lend to the poor women when organised in SHGS, even though they have no collateral as such.
Thus, the SHGs help borrowers overcome the problem of lack of collateral.
Why is cheap and affordable credit important for the country’s development? Explain any three reasons.
Or “Cheap and affordable credit is crucial for the country’s development.” Assess the statement.
(i) Cheap and affordable credit encourages people to invest in agriculture, do business and set up small scale industries.
(ii) Affordable credit also ends the debt trap
(iii) Cheap credit enable more investment. This leads to acceleration of economic activity.
(iv) Cheap credit allows weaker sections of society to access formal sector of lending and get rid of from informal oneylenders.
(v) Cheap and easy terms of credit inspires better investment in technology.
How can formal sector loans can be made beneficial for poor farmers and workers. Suggest any five measures
(i) Create awareness to farmers about formal sector loans.
(ii) Process of providing loans should be made easier.
(iii) More number of Nationalized Banks/cooperative banks should be opened in rural sector.
(iv) Banks and cooperatives should increase facility of providing loans so that dependence on informal sources of credit reduces.
(v) The benefits of loans should be extended to poor farmers and small scale industries.
Describe the bad effects of informal sources of credit on borrowers:
Informal lenders charge a much higher interest on loans. Thus the cost of borrowing increases
Due to higher interest rate a larger part of the earnings of the borrowers is used to repay the loan.
Many times the amount to be repaid is greater than the income of the borrower. This increases debt and debt trap.
People who want to start an enterprise by borrowing, may do not so due to the high cost of borrowing.
Illustrate with examples the role of ‘loan’ in ‘business’.
Loan is a crucial element in economic life and plays a vital and positive role.
Credit helps to meet the working capital need of production.
Credit helps to meet the ongoing expenses of production.
Credit helps to increase earnings and therefore the person is better off than before.
Credit therefore plays a vital and positive role in this situation.
Example : Salim, a shoe manufacturer took a loan from different sources to complete the order of 3000 pair of shoes, in the end he delivered the order, made profit and repaid the loan.
Explain the role of banks with regard to money which they accept from the public.
(i) Banks accept the deposits and pay an amount as interest on the deposits.
(ii) Banks keep only a small proportion (15 %) of their deposits as cash deposits.This is kept to pay the depositors who might come to withdraw money from the bank on any given day.
(iii) Banks use a major portion the deposits to extend loan requirements of the people.
(iv) Banks act as mediator between those who have surplus
funds (the depositors) and those who need these funds (the borrowers).
(v) Banks charge a higher interest rate on loans than what they offer on deposits.
Explain various functions of banks in India.
Or How does a bank work as a key component of the financial system ? Explain.
(i) Banks accept the deposits and pay an amount as interest on the deposits.
(ii) The banks hold only certain percent (15%) of their deposits as cash with themselves to pay depositors who may come to withdraw.
(iii) Banks use a major portion the deposits to extend loan requirements of the people.
(iv) Banks act as mediator between those who have surplus
funds (the depositors) and those who need these funds (the borrowers).
(v) Banks promote agricultural and industrial sector by providing loans.
(vi) Banks are the backbone of the country’s trade.
“The Reserve Bank of India supervises the functioning of formal sources of loans.” Support the statement with examples.
(i) The Reserve Bank of India supervises the functioning of formal sources of loan.
(ii) The RBI monitors the banks in maintaining the cash balance.
(iii) RBI ensures that the banks give loans not just to a profit-making
business and trades but also to small cultivators and small-scale industries and farmers also.
(iv) Periodically banks have to submit information to RBI on how much they are lending to whom and at what interest rate.
(v) RBI supervises whether banks maintain minimum cash balance out of the deposits they receive.
How does credit play a vital and positive role ? Explain with an example.
Or Describe the vital and positive role of credit with examples
Credit plays a positive role when the borrower is able to return the loan amount on time
Credit helps to meet the working capital need of production.
Credit helps to meet the ongoing expenses of production.
Credit helps to increase earnings and therefore the person is better off than before.
Credit therefore plays a vital and positive role in this situation.
Example : Salim, a shoe manufacturer took a loan from different sources to complete the order of 3000 pair of shoes, in the end he delivered the order, made profit and repaid the loan.
‘‘Credit can play a negative role.’’ Justify the statement with arguments..
Credit plays a negative when the borrower is not able to repay the loan.
In rural areas, the main demand for credit is for crop production.
Sometimes failure of the crop makes loan repayment impossible.
In this situation the borrower is not able to repay the loan
To repay her loan person has to sell a part of land
In this situation, the condition of the borrower gets much worse off than before and he gets trapped in the debt trap.
Credit in this case pushes the borrower into a situation from which recovery is very painful.
Explain the three important terms of credit.
Or What are the main terms of credit ?
Interest rate : Every loan agreement specifies an interest rate which the borrower must pay to the lender along with the repayment of the principal.
Collateral : The lender may demand collateral(such as land, building, vehicle, livestocks, deposits with banks) against loan.
Mode of repayment
Documentation requirement : The documentation is required where terms and conditions are mentioned.
Mode of repayment : It is the duration (monthly installments) in which the loan is to be repaid.
Why is modern currency accepted as a medium of exchange without any use of its own ? Find out the reason.
Modern currencyis accepted as a medium of exchange because
(i) Modern currency is authorised by the government of a country.
(ii) In India, the Reserve Bank of India issues currency notes on behalf of the central government.
(iii) As per Indian law, no other individual or organisation is allowed to issue currency.
(iv) Law legalises the use of rupee as a medium of payment that cannot be refused in settling transactions in India.
(v) No individual in India can legally refuse a payment made in rupees.
‘‘Money has made transactions easy.’’ Justify.
Or How does the use of money make it easier to exchange things? Explain with examples.
(i) A person holding money can easily exchange it with any commodity or service that he desires.
(ii) Everyone prefer to receive payments in money and then exchange the money for articles that they desires.
(iii) Money transaction system is far better than the barter system. It solve the problems of double coincidence of wants.
(iv) Money acts as an intermediate in the exchange process.
(v) Example :- The shoe manufacturer will first exchange shoes that he has produced for money and then exchange the money for wheat.
How can money easily exchange it for goods or services? Give example to explain.
A person holding money can easily exchange it for any commodity or service.
Everyone wants to receive payments in money and exchange the money for things they want.
For example: he shoe manufacturer will first exchange shoes that he has produced for money and then exchange the money for wheat.
If the shoe maker had to directly exchange shoes for wheat without the use of money. He would have to look for a wheat growing farmer who not only wants to sell wheat but also wants to buy the shoe in exchange. Both the parties have to agree to sell and buy each others commodities. This process is very difficult, time consuming and unhealthy.
“Deposits with the banks are beneficial to the depositors as well as to the nation.” Explain the statement.
Or How are deposits with the banks beneficial for individual as well as for the nation? Explain with examples'
Benefit to the depositor
(i) Bank accepts the deposits and pays interest to the depositor.
(ii) People’s money is safe with the bank.
(iii) People can withdraw the money when they require.
Benefit to the Nation
(i) Banks provide loans at low interest rate which are used for various economic activities.
(ii) Banks employ a large number of people. Thus they minimize employment problems.
(iii) Banks are the backbone of the country’s trade.
“Bank plays an important role in the economic development of the
country.” Support the statement with examples.
Or ‘‘Banks are playing an important role in the development of the Indian economy.’’ Support the statement with examples.
Or How do banks play an important role in the economy of India? Explain.
(i) Banks provide interest on deposits money. Thus, they contribute to the family income.
(ii) Banks provide loans at low interest rate which are used for various economic activities.
(iii) ‘The banks mediate between those who have surplus money and those who need money.
(iv) Banks are the backbone of the country’s trade.
(v) Banks employ a large number of people. Thus they minimize employment problems.
(vi) Banks promote agricultural and industrial sector by providing loans.
Review any three merits and any two demerits of ‘formal sector of credit’ in India.
Merits
(i) They provide cheap (at low interest rate) credit. This reduces the chance of the borrower to be trapped in a debt trap.
(ii) They help to meet the working capital needs of production.
(iii) The RBI supervises the functioning of formal sector of credit. Therefore, they can not use unfair means to get the money back.
Demerits
(i) Most poor people do not get loans from this source due to absence of collateral.
(ii )Formal sector of credit’ require proper documents.
(iii) Lack of credibility in rural areas.
Read the following source and answer the questions that follow :
A House Loan
Megha has taken a loan of 5 lakhs from the bank to purchase a house. The annual interest rate on the loan is 12 per cent and the loan is to be repaid in 10 years in monthly instalment s. Megha had to submit to the bank, documents showing her employment records and salary before the bank agreed to give her the loan. The bank retained as collateral the papers of the new house, which
will be returned to Megha only when she repays the entire loan with interest.
(i) From which source of credit Megha has taken loan?
Formal Sector/ Bank
(ii) Explain the terms of credit given in the source.
Documents showing her employment records and salary
Collateral -the papers of the new house
Explain the role of Self –Help Groups in rural society.
(i) Self Help groups help rural poor to collect their savings.
(ii) Self –Help Groups in rural society is a way of providing loans to the poor.
(iii) The SHGs help borrowers overcome the problem of lack of collateral.
(iv) They help women to become financially self-reliant
(v) SHGs provide small loans at reasonable interest rates to its members for their needs
(vi) “Self-Help Groups” the building blocks of the rural poor.
(vii) Self-Help Groups also provide a platform to discuss various social issue.
(viii) Self Help Groups help the poor household in getting loans easily and prevents them from falling under the clutches of moneylenders.
Why is the necessary for the banks and cooperative societies to increase their lending facilities in rural areas? Explain.
Or Explain any three reasons for the banks and cooperative societies to increase their lending facilities in rural areas.
(i)Banks and cooperative societies help by providing more credit facilities at cheaper rates. Farmers can grow crops, do business, set up small-scale industries through these loans
(ii) Banks and cooperative societies reduce the dependence on informal sector of credit
(iii) Banks and cooperative societies are needed to save poor farmers from debt trap.
(iv) Banks and cooperative societies save people from getting exploited from money lenders.
(v) The bank and the cooperative societies help to increasing income and improving the livelihood of the people in the rural areas
Credit has its own unique role for development' Justify the statement with arguments.
Or Explain with an example the role of credit for development.
(i) Credit play a vital and positive role in the development
(ii) Credit helps to increase earning and therefore the person is better off than before.
(iii) Credit leads to increased production and employment.
(iv)Credit helps in the development of infrastructure of the society that leads to the overall development.
(v) Cheap and affordable loans give people an opportunity to develop their business.
(vi) Credit plays a very crucial role in agricultural and other activities.
(vii) Credit provides necessary aid to industries for improvement and development.
Justify the role of Self-Help Groups in the rural economy.
(i) Self Help groups help rural poor to collect their savings.
(ii) SHGs provide small loans at reasonable interest rates to its members for their needs
(iii) They help in creating self-employment opportunities for the
members.
(iv) Self Help Groups help the poor household in getting loans easily and they prevent poor from harassment of the money lenders and landlords.
(v) The SHGs help borrowers overcome the problem of lack of collateral.
(vi) Self Help Groups help women to become financially self-reliant.
(vii) “Self-Help Groups” the building blocks of the rural poor.
For Example Small loans provide to the members for releasing mortgaged land, for meeting working capital needs, for housing materials, for sewing machine, handlooms, cattle, etc.
Analyse the situation in which credit pushes the borrower into a situation from which recovery is painful.
Or “Credit sometimes pushes the borrower into a situation from which recovery is very painful.” Support the statement with examples
It happens when the borrower is not able to repay the loan.
In rural areas, the main demand for credit is for crop production.
Sometimes failure of the crop makes loan repayment impossible.
In this situation the borrower is not able to repay the loan
To repay her loan person has to sell a part of land
In this situation, the condition of the borrower gets much worse off than before and he gets trapped in the debt trap.
Credit in this case pushes the borrower into a situation from which recovery is very painful.
(Example -A small farmer Swapna took loan for crop cultivation but due to some reason she faced the situation of crop failure. So she took another loan for spraying pesticides but the production was not enough to repay the loan. So she was caught in debt-trap.
What are Self Help Groups? How do they work? Explain.
Self help groups are the organization of the rural poor (in particular women) which promote small savings among their members.
(i) A SHG has 15-20 members, which are usually neighbour, they meet and save regularly.
(ii) Self Help groups help rural poor to collect their savings.
(iii) SHGs provide small loans at reasonable interest rates to its members for their needs
(iv) After a year or two, if the group is regular in savings, it becomes eligible for availing loan from the bank.
(v) Most of the important decisions regarding the savings and loan activities are taken by the group members.
(vi) Self Help Group is also responsible for the repayment of the loan.
How does credit play a positive and negative role? Explain with examples.
Positive role of credit:
Credit plays a positive role when the borrower is able to return the loan amount on time
Credit helps to meet the working capital need of production.
Credit helps to meet the ongoing expenses of production.
Credit helps to increase earnings and therefore the person is better off than before.
Credit therefore plays a vital and positive role in this situation.
Example : Salim, a shoe manufacturer took a loan from different sources to complete the order of 3000 pair of shoes, in the end he delivered the order, made profit and repaid the loan.
Negative role of credit:
Credit plays a negative when the borrower is not able to repay the loan.
In rural areas, the main demand for credit is for crop production.
Sometimes failure of the crop makes loan repayment impossible.
In this situation the borrower is not able to repay the loan
To repay her loan person has to sell a part of land
In this situation, the condition of the borrower gets much worse off than before and he gets trapped in the debt trap.
Credit in this case pushes the borrower into a situation from which recovery is very painful.
(Example -A small farmer Swapna took loan for crop cultivation but due to some reason she faced the situation of crop failure. So she took another loan for spraying pesticides but the production was not enough to repay the loan. So she was caught in debt-trap.

03 : Money And Credite

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