NCERT Solutions for Class 10 Social Science Economics Ch 3 Money and Credit
Exercises, Page - 52
1. In situations with high risks, credit might create further problems for the borrower. Explain.
Answer:
The main demand for credit is for crop production. Farmers usually take crop loans at the beginning of the season and repay the loan after harvest. Repayment of the loan is crucially dependent on the income from farming. Many times credit helps to increase earning and therefore the person is better off than before. But in another situation, because of the crop failure credit pushes the person into a debt-trap. In this situation the person is worse off than before. Whether credit would be useful or not, therefore, depends on the risks in the situation.
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 if for any commodity or service that he or she might want. For example, it is no longer necessary for the shoe-maker 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.
3. How do banks mediate between those who have surplus money and those who need money ?
Answer:
Banks use the major portion of the deposits to extend loans. There is a huge demand for loans for various economic activities. In this way, banks mediate between those who have surplus funds and those who are in need of these funds. Banks charge a higher interest rate on loans than what they offer on deposits. The difference between what is charged from borrowers and what is paid to depositors in their main source of income. Thus by accepting deposits and by advancing loans banks mediate between those who have surplus money and those who need money.
4. Look at a 10 Rupee note. What is written on top ? Can you explain this statement ?
Answer:
Reserve Bank of India is written on top of a 10 Rupee note. 10 Rupee note is acceptable as a medium of exchange because this 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.
5. Why do we need to expand formal sources of credit in India ?
Answer:
The formal sector still meets only about half of the total credit needs of the rural people. The remaining credit needs are met from informal sources. Most loans from informal lenders carry a very high interest rate and do little to increase the income of the borrowers-thus it is necessary that formal sources increases their lending particularly in rural area, so that the dependence on informal sources of credit reduces.
People who might wish to start an enterprise by borrowing may not do so because of high cost of borrowing, thus we need to expand formal sources of credit in India which will lead to higher incomes.
6. What is the basic idea behind the SHGs for the poor ? Explain in your own words.
Answer:
The basic idea behind the SHGs is meant to create self-employment opportunities for the poor. The SHGs help poor borrowers to overcome the problem of lack of collateral. They can get timely loans for variety of purposes and at a reasonable interest rate. Moreover, SHGs are the building blocks of organisation of the rural poor.
7. What are the reasons why the banks might not be willing to lend to certain borrowers ?
Answer:
A number of borrowers have not collateral against loans. Collateral is an asset that the borrower owns and uses this as a gurantee to a lender until the loan is repaid. The main demand for loans is for crop production. And repayment of the loan is crucially dependent on the income from farming. Whether loans would be useful or not, therefore, depends on the risks in the situations. That is why, banks have no inetrest to lend to certain borrowers. Thus the banks might not be willing to lend to those borrowers who have no collateral and those who have no repaying capacity.
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 banks in following ways :-
- The RBI supervises that the banks maintain a minimum cash balance out of the deposits they receive.
- Secondly, RBI monitors that the banks actually maintain the cash balance.
- The RBI sees that the banks give loans not just to profit-making business and traders but also to small cultivators, small scale industries, to small borroers etc.
9. Analyse the role of credit for development.
Answer:
Credit can play an important role for country's development. For this, banks and co-operative socities need to lend more. This would lend to higher incomes because many people could then borrow cheaply for a variety of different needs. They could grow crops, do business, set up small scale industries etc. They could set up new industries or trade in goods. 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.
10. Manav needs a laon to set up a small business. On what basis will Manav decide whether to borrow from the bank or the moneylender ? Discuss.
Answer:
Manav will decide to borrow from the bank or the moneylender on the cost of borrowing basis. Most of the informal lenders charge a much higher interest on loans. Thus the cost to the borrower of informal loans is much higher. Higher cost of borrowing means a larger part of the earnings of the borrower is used to repay the loan. In certain cases, the high interest rate of borrowing can mean that the amount to be repaid is greater than the income of the borrower. This could lead to debt-trap. So Manav could borrow cheaply from the bank.
11. In India, about 80 per cent of farmers are small farmers, who need credit for cultivation ?
(a) 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 lender until the loan is repaid. That is why banks have no inetrest to lend to small farmers.
(b) What are the other sources from which the small farmers can borrow ?
Answer:
These small farmers take loans from informal lenders including moneylenders, traders, employers, relatives and friends etc.
(c) Explain with an example how the terms of credit can be unfavourable for the small farmer.
Answer:
The terms of credit can be unfavourable for the small farmers because of the crop failure. In this situation credit pushes the farmers into debt trap.
(d) 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 co-operative socities need to lend more. This would lead to higher incomes because many people could then 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.
12. Fill in the blanks.
(i) Majority of the credit needs of the _________ households are met from informal sources.
(ii) _________ costs of borrowing increase the debt-burden.
(iii) ___________ issues currency notes on behalf of the central Government.
(iv) Banks charge a higher interest rate on loans than what they offer on________.
(v) __________ is an asset that the borrower owns and uses as a guarantee until the loan is repaid to the lender.
Answer:
(i) poor
(ii) Higher
(iii) Reserve Bank of India
(iv) bank of deposit
(v) Part of land
13. Choose the most appropriate answer.
(i) In a SHG most of the decisions regarding savings and loan activities are taken by -
(a) Bank
(b) Members
(c) Non-government organisation
Answer:
(b) Members
(ii) Formal sources of credit does not include -
(a) Banks
(b) Co-operatives
(c) Employers
Answer:
(c) Employers