NCERT Solutions For Money and Credit
1. In situations with high risks, credit might create further problems for the borrower. Explain.
Ans. Another term for this state would be ‘debt-trap’. 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. 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 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. There are cases in India, where non repayment of loans leads to farmer’s suicides, example, Maharashtra. Thus, it depends on various factors to conclude whether a credit is useful or not.
Q. 2. How does money solve the problem of double coincidence of wants? Explain with an example of your own.
Ans. Double coincidence of wants is an essential feature, where goods are directly exchanged without the use of money is also ‘known Barter system’. By serving as a medium of exchanges, money removes the need for double coincidence of wants and the difficulties associated with the barter system. For example- a farmer no longer has to look for a shoe maker, who will buy his cereals and at the same time and sells 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.
Q. 3. How do banks mediate between those who have surplus money and those who need money?
Ans. Banks keep small deposits as cash (15%) for themselves (to pay the deposits on demand). They use the major portion of the deposits to extend loans to those who need money. In this way, banks mediate between those who have surplus money and those who need money
Q. 4. Look at a 10 rupee note. What is written on top? Can you explain this statement?
Ans. There are two things which are mentioned on top right on a 10 rupee note; ‘Reserve Bank of India’ and ‘Guaranteed by the Government’. Reserve Bank of India issues currency notes on behalf of the central government of India. 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.
Q. 5. Why do we need to expand formal sources of credit in India?
Ans. We need to expand formal sources of credit in India:
- To reduce dependence on informal sources of credit because the latter charge high interest rates and do not benefit the borrower much.
- 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.
- 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 to the formal sources of credit 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.
Q. 6. What is the basic idea behind the SHGs for the poor? Explain in your own words.
- SHG’s basic idea is to provide financial resource for the poor through organising the rural poor especially women, into small Self Help Groups.
- They are also responsible for providing timely loans at a reasonable interest rate without collateral.
- There are some main objectives of SHGs, which are as followed –
- It organises the rural poor, especially women, into small Self Help Groups.
- It collects saving of the members.
- It provides loans without collateral.
- It provides timely loans for various purposes.
- It provides loans at reasonable rate of interest and on easy terms.
- It also provides a platform to discuss and act on a variety of social issues such as education, health, nutrition, domestic violence, etc.
Q. 7. What are the reasons why the banks might not be willing to lend to certain borrowers?
Ans. The Banks might not be willing to lend certain borrowers due to the following reasons:
- Banks require proper and legal documents and collateral as security against loans.
- The borrowers who have not repaid previous loans, the banks might not be willing to lend them further.
- Those entrepreneurs, who are going to invest in a business with high risks, the banks might not be willing to lend money.
- One of the main objectives of a bank is to earn more profits after meeting a number of expenses.
- For this purpose, it has to adopt judicious loan and investment policies which ensure fair and stable return on the funds.
Q. 8. In what ways does the Reserve Bank of India supervise the functions of Banks? Why is this necessary?
Ans. The Reserve Bank of India supervises the functions of banks in various ways:
- 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.
- The commercial banks have to submit information to RBI on how much they are lending, to whom, and at what interest rate, etc.
9. Analyse the role of credit for development.
- Credit refers to an agreement in which lender supplies the borrowers with money, goods and services in return for the promise of future payments.
- Whether credit will be useful or not, depends upon the risks in the situation and on whether there is some support in case of loss.
- When a borrower takes a loan from the bank for increasing the production of goods and he/she is able to increase it and pay the loan back to the bank within the given time limit, then credit has played a positive role in making him/her wealthy.
Q10. 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.
- Manav needs a loan to set up a small business. Manav will decide on whether to borrow from the bank or the moneylender on the basis of various factors:
- Firstly, he must have a collateral or asset which can guarantee his loan.
- If he lacks such an asset, he cannot get a loan from the bank. In this scenario, he will have to go to a moneylender, even though the latter charges a higher interest rate.
- Secondly, if Manav is not aware of the banes of borrowing from the informal sector, he might not even consider taking a bank loan.
- Thirdly, if there are no banks in or near his area of residence or work place, then he will borrow from a moneylender.
Q11. 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?
(b) What are the other sources from which the small farmers can borrow?
(c) Explain with an example how the terms of credit can be unfavourable for the small farmer.
(d) Suggest some ways by which small farmers can get cheap credit.
Ans. (a) Banks might be unwilling to lend to small farmers because small farmers usually lack proper documents and collateral or asset.
(b) The other sources from which the small farmers can borrow are moneylenders, relatives or friends, self-help groups and cooperative banks.
(c) The terms of credit can be unfavourable for the small farmer if he has a bad crop, and is forced to either surrender his collateral (if he borrowed from a bank) or sell off a part of his land (if he borrowed from the informal sector), in order to repay his loan.