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NCERT Class 10 Social Science Chapter 20 Money and Credit
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Money and Credit
Chapter – 20
UNDERSTANDING ECONOMIC DEVELOPMENT (ECONOMICS)
TEXT BOOK QUESTIONS
Q. 1. In situations with high risks, credit might create further problems for the borrower. Explain.
Answer: It is correct that the situations with high risks, credit might create further problems for the borrower-
(i) The borrower had to pay interest on principal as well as on interest to lenders.
(ii) The lenders can go against the defaulter borrower in the court to recover his principal amount and interest thereupon. The borrower will have to appear in the court. This will definitely be a situation not liked by any respectable member of a society.
(iii) Sometimes, the lender can sell the security or the assets as collateral pledged with the banks or co-operative society or any informal agency of credit.
Q. 2. How does money solve the problem of double coincidence of wants? Explain with an example of your own.
Answer: Double coincidence of wants is an essential feature in a barter system where goods are directly exchanged without the use of money. But on other hand in an economy where money is in use, money by providing the crucial intermediate step eliminates the need for double coincidence of wants. A person holding money can easily exchange it for any commodity or service that he or she might want.
For example, it is no longer necessary for the shoemaker to look for a farmer who will buy this shoes and at the same time sell him rice. All he has to do is find a buyer for his shoes. Once he has exchanged his shoes for money he can purchase rice or any commodity in the market.
Q. 3. How do banks mediate between those who have surplus money and those who need money?
Answer: Usually, two types of people go to the banks — one who has surplus money to deposit or the other who wants loans. The banks mediate between these two types of people. To the depositors, bank give them interest and from those persons who take loans they charge a higher interest rate than what offer to the depositors. Thus, the difference between what they charge from the borrowers and what they offer to the depositors is the main source of their income.
Q. 4. Look at a 10 Rupee note. What is written on top? Can you explain this statement?
Answer: On the top of a 10 Rupee note “Reserve Bank of India Guaranteed by the Central Government is written.”
It implies that the notes are issued by Reserve Bank of India on behalf of the Central Government. This means that the currency is Reserve authorized or guaranteed by the Central Government and no one can refuse payment made in it.
Indian laws legalized the use of rupee (₹) as media of payment. Nobody can refuse to accept a transaction in India.
Q. 5. Why do we need to expand formal sources of credit in India?
Or
Why is it necessary to expand formal sources of credit? Give three reasons.
Answer: (i) It will cease the process of increasing parallel money to some extent.
(ii) It will protect vulnerable section of society from falling into debt-trap.
(iii) People will be protected from coercion, humiliation and prosecution that is generally inflicted by formal sources like moneylenders, landlords, etc.
(iv) This would also lead to higher incomes and many people could then borrow cheaply for a variety of needs.
Q. 6. What is the basic idea behind the SHGs for the poor? Explain in your own words.
Answer: SHGs: The full form of the SHGs is Self Help Groups. Its aim is to increase small savings habits in rural areas, especially the poor of this areas.
Likewise, groups will cater to casual need of money themselves and members to those groups are protected from falling in the debt trap. It will cause their meeting from time to time and thus, apart from money saving, they would able to cooperate each other in matter outside money viz., development issues for the entire village, marital ties, settlement of petty disputes and dispensions, etc.
Q. 7. What are the reasons why the banks might not be willing to lend to certain borrowers?
Answer: (i) Bank loans require proper documents and collateral. Most of the poor people don’t possess anything to collateral.
(ii) The formal sources provide loans only for productive purposes, whereas the poor people may demand loans for non-productive purposes like marriages, etc.
Q. 8. In what ways does the Reserve Bank of India supervise the functioning of banks? Why is this necessary?
Answer: The Reserve Bank of India supervises the functioning of formal sources of loans. For instance, we have seen that the banks maintain a minimum cash balance out of the deposits they receive. The RBI monitors that the banks actually maintain the cash balance. Similarly, the RBI sees that the banks give loans not just to profit-making businesses and traders but also to small cultivators, small scale industries and small borrowers, etc. Periodically, banks have to submit information to the RBI on how much they are lending, to whom and at what interest rate, etc.
The supervision of RBI is necessary due to the following reasons:
(i) It ensures safety to the bank deposits of people.
(ii) It helps in the collection of economic data all over the country.
(iii) It contains corrupt practices that may creep within banks.
(iv) It supports the doctrine of equity and justice in circulation of money through accepting deposits and lending in an orderly manner.
(v) Information sent by banks to RBI helps Ministry of Finance in drafting and submission of National Budget each year.
Q. 9. Analyze the role of credit for development.
Or
Critically evaluate the role of credit for development.
Answer: (i) The role of credit for development is very essential and useful. Now a days no individual or household-poorer or richer-are in a position to arrange all money required at all time by themselves. They have to borrow the money from formal or informal sources.
(ii) Credit is available from a variety of sources. These can be either formal sources or informal sources.
(iii) Terms of credit vary substantially between formal and informal lenders. At present, it is the richer households who receive credit from formal sources whereas, the poor have to depend on the informal sources. It is essential in modern synonyms to make terms of credit flexible with formal sources of credit e.g., banks, etc. in order to safeguard interests of the poor sections of society in India.
(iv) In prevailing situations, if credit can be made available to the poor people on terms and conditions that are appropriate and reasonable, these millions of small entrepreneurs with their millions of small pursuits can add up to create the biggest development wonder.
Q. 10. 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.
Answer: Manay will decide to borrow from the bank or the moneylender on the following basis:
(i) Difference between rate of interest charged by formal and informal sources at the material time. Financial institutions including banks will be contacted for this purpose.
(ii) Perusal upon terms of credit viz. paper work, security, collateral, etc. made necessary by respective sources.
(iii) Mode of payment viz, size of installment, frequency (monthly, quarterly, half-yearly or annually) or full repayment at the end of a certain period i.e., two years, three years and so on.
(iv) His own capacity for repayment.
(v) A thorough analysis of information collected.
Only then, Manav would select the formal or informal source the most facilitating and suitable to his capacity of repayment.
Q. 11. In India, about 80 percent of farmers are small farmers, who need credit for cultivation.
(i) Why might banks be unwilling to lend to small farmers?
Answer: Small farmers have no collateral against loans. Collateral is an asset that the borrower owns and uses this as a guarantee to a leader until the loan is repaid. That is why banks have no interest in lending to small farmers.
(ii) What are the other sources from which the small farmers can borrow?
Answer: These small farmers take loans from informal lenders including money lenders, traders, employers, relatives and friends, etc.
(iii) Explain with an example how the terms of credit can be unfavorable for the small farmer.
Answer: The terms of credit can be unfavorable for the small farmers because of the crop failure. In this situation credit pushes the farmers into debt trap.
(iv) Suggest some ways by which small farmers can get cheap credit.
Answer: The formal sector still meets only about half of the total credit needs of the small farmers. The remaining credit needs are met from informal sources.So banks and cooperative societies need to lend more. This world leads to higher incomes because many people could borrow cheaply for a variety of different needs. They could grow crops, do business, set up small scale industries, etc. Cheap and affordable credit is crucial for the country’s development.
Q. 12. Fill in the blanks:
(i) Majority of the credit needs of the __________ households are met from informal sources.
Answer: Poor.
(ii) ___________ costs of borrowing increase the debt-burden.
Answer: Higher.
(iii) _________ issues currency notes on behalf of the Central Government.
Answer: Reserve Bank of India.
(iv) Banks charge a higher interest rate on loans than what they offer on __________.
Answer: Deposits.
(v) _________ is an asset that the borrower owns and uses as a guarantee until the loan is repaid to the lender.
Answer: Land.
Q. 13. Choose the correct answer:
(i) In a SHG most of the decisions regarding savings and loan activities are taken by:
(a) Bank.
(b) Members.
(c) Non-government organization.
Answer: (b) Members.
(ii) Formal sources of credit does not include:
(a) Banks.
(b) Co-operatives.
(c) Employers.
Answer: (c) Employers.