Money and Credit CBSE Class 10 Economics solutions
Money and Credit NCERT Class 10 Economics solutions
In situations with high risks, credit might create further problems for the borrower. Explain.
When the cultivation of any crop is dependent on rain , a natural resource, then the cultivation is risky. If the rains fail there is crop failure, then credit pushes the person into a debt trap. To repay the loan the farmer has to sell his assets. Then he is clearly much worse off than before. Whether credit would be useful or not, therefore, depends on the risks in the situation.
How does money solve the problem of double coincidence of wants? Explain with an example of your own.
In an economy where money is in use, money by providing the crucial intermediate step eliminates the need for double coincidence of wants.
For example, if money is used in trading, then if a person who manufacture utensils wants to buy clothes, he need not go in search of a clothes manufacturer who wants to buy utensils. He can sell his utensils to anybody for money and then buy the clothes he wants from anybody.
How do banks mediate between those who have surplus money and those who need money?
People with extra cash deposit it with the banks by opening a bank account in their name. Banks accept the deposits and also pay an interest on the deposits. Banks 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 funds (the depositors) and those who are in need of these funds (the borrowers). Banks charge a higher interest rate on loans than what they offer on deposits.
Look at a 10 rupee note. What is written on top? Can you explain this statement?
a. Reserve Bank of India â€“ As the Reserve Bank of India issues the currency its name is written on the 10 Rupee note.
b. Guaranteed by the central Government â€“ Since the RBI issues the currency on behalf of the Central Government it stands guarantee.
c. Promise to pay the barer the sum of Ten Rupees â€“ As the currency is worth 10 Rupees the promise is made by the government.
d. The words 10 rupees is written in all the 15 national languages.
e. The signature of the Governor of RBI is also seen on the currency.
Why do we need to expand formal sources of credit in India?
Formal sector loans need to expand, as it is necessary that everyone receives these loans. At present, it is the richer 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.
What is the basic idea behind the SHGs for the poor? Explain in your own words.
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 from Rs 25 to Rs 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.
What are the reasons why the banks might not be willing to lend to certain borrowers?
Bank loans require proper documents and collateral. Absence of collateral is one of the major reasons why the banks might not be willing to lend to certain borrowers.
In what ways does the Reserve Bank of India supervise the functioning of banks? Why is this necessary?
The Reserve Bank of India supervises the functioning of formal sources of loans in banks. The banks have to maintain a minimum cash balance out of the deposits they receive. The RBI monitors that the banks actually maintain the cash balance. The RBI also sees that the banks give loans not just to profit-making businesses and traders but also to small cultivators, small scale industries, and to small borrowers. Periodically, banks have to submit information to the RBI on how much they are lending, to whom, and at what interest rate.
Analyse the role of credit for development.
The crucial issue of credit is its availability to all, especially the poor, and on reasonable terms. The availability of credit is the right of the people and without this credit a large section of the population would be kept out of the development process.
As Professor Muhammad Yunus, the founder of Grameen Bank and recipient of 2006 Nobel Prize for Peace said, “If credit can be made available to the poor people on terms and conditions that are appropriate and reasonable, then millions of small people with their millions of small pursuits can add up to create the biggest development wonder.”
It is essential that the total formal sector credit increases so that the dependence on the more expensive informal credit becomes less. Also, the poor should get a much greater share of formal loans from banks, cooperative societies etc. Both these steps are important for development.
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.
The availability of proper documents and collateral will be the major deciding factor for Manav to choose between borrowing from the bank or the moneylender. Bank loans require proper documents and collateral. Absence of collateral is one of the major reasons why the banks might not be willing to lend to certain borrowers.
If Manav cannot produce proper documents or pledge some assets as collateral then he will have to borrow from a money lender.
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.
80 % of farmers in India are small farmers. As they are dependent on rain , which sometimes fails resulting in crop failure , the farmers are in debt. To over come this situation farmers need to get credit on low interest rates.
(a) Bank loans require proper documents and collateral. Absence of collateral is one of the major reasons why the banks are not willing to lend to small farmers.
(b) Farmers sometimes borrow loans from traders and money lenders. These informal sources of credit are a burden for the farmers as the rate of interest is very high.
(c) When the cultivation of any crop is dependent on rain , a natural resource, then cultivation is risky. If rains fail there is crop failure, then credit at a high interest rate, pushes the person into a debt-trap. To repay the loan the farmer has to sell his assets. Then he is much worse off than before. Whether credit would be useful or not, therefore, depends on the risks in the situation.
(d) Banks and cooperative societies need to lend more to the underprivileged so that they could grow crops, do business, set up small-scale industries etc. Farmers can also get loan from SHGs.
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