3. Money and Credit

Content Structure

• 1. NCERT Solutions
• 2. Extra Questions and Answers
  • 2A. Multiple Choice Questions (MCQs)
  • 2B. Very Short Type Questions and Answers
  • 2C. Short Answer-type Questions
  • 2D. Case/Source-based Questions and Answers
  • 2E. Long Questions and Answers

1. NCERT Solutions

1. In situations with high risks, credit might create further problems for the borrower. Explain.
Ans: In situations with high risks, credit can make the borrower worse off instead of helping to increase earnings. For example, Swapna, a small farmer, took a loan for crop production. Her crop was attacked by pests and failed. Even after using expensive pesticides, she could not save the crop. As she could not repay the loan, her debt increased. The next year, she took another loan, but her earnings were not enough to repay the old loan. Finally, she had to sell part of her land to repay the debt. This is called a debt trap.

2. How does money solve the problem of double coincidence of wants? Explain with an example of your own.
Ans: In a barter system, goods are directly exchanged without using money. For an exchange to take place, both persons must want to buy what the other person wants to sell. This is called double coincidence of wants. Money removes this difficulty because it acts as a medium of exchange. For example, suppose a person has rice and wants clothes. He can first sell the rice and receive money. He can then use the money to buy clothes. He does not have to find a cloth seller who wants rice in exchange.

3. How do banks mediate between those who have surplus money and those who need money?
Ans: Banks accept deposits from people who have surplus funds. They keep only a small proportion of these deposits as cash and use the major portion to extend loans. People who need money for different economic activities can take these loans. In this way, banks act as a link between depositors, who have surplus funds, and borrowers, who need funds. Banks charge a higher interest rate on loans than what they offer on deposits. The difference between these two interest rates is their main source of income.

4. Look at a 10 rupee note. What is written on top? Can you explain this statement?
Ans: “Reserve Bank of India” is written on the top of the currency note. In India, the Reserve Bank of India issues currency notes on behalf of the central government. According to Indian law, no other individual or organisation is allowed to issue currency. The law also legalises the use of the rupee as a medium of payment in India. Therefore, a payment made in rupees cannot legally be refused in settling transactions in India. This is why the rupee is widely accepted as a medium of exchange.

5. Why do we need to expand formal sources of credit in India?
Ans: We need to expand formal sources of credit because poor households still depend on informal sources of credit. Informal lenders usually charge a much higher interest on loans, so the cost of borrowing becomes high. A large part of the borrower’s earnings may then be used to repay the loan, leaving less income for the borrower. In some cases, high interest can lead to increasing debt and a debt trap. Therefore, banks and cooperative societies should increase their lending, particularly in rural areas. Poor people should also receive a greater share of formal loans so that they can benefit from cheaper loans.

6. What is the basic idea behind the SHGs for the poor? Explain in your own words.
Ans: The basic idea behind SHGs is to organise the rural poor, especially women, into small groups and collect their savings. A typical SHG has 15–20 members who usually belong to one neighbourhood. They meet and save regularly. Members can take small loans from the group to meet their needs. The group charges interest, but it is still less than what the moneylender charges. After one or two years of regular savings, the group becomes eligible for a bank loan. SHGs help poor borrowers overcome the problem of lack of collateral and get timely loans at a reasonable interest rate. They also help women become financially self-reliant.

7. What are the reasons why the banks might not be willing to lend to certain borrowers?
Ans: Banks may not be willing to lend to certain borrowers because bank loans require proper documents and collateral. Poor people often do not have an asset that they can use as collateral. The absence of collateral is one of the major reasons that prevents poor people from getting bank loans. Banks may also require documents showing the borrower’s necessary details before agreeing to give a loan. Because of these requirements, poor borrowers may find it difficult to obtain loans from banks. Informal lenders such as moneylenders may be easier to approach because they know borrowers personally and may provide loans without collateral.

8. In what ways does the Reserve Bank of India supervise the functioning of banks? Why is this necessary?
Ans: The Reserve Bank of India (RBI) supervises the functioning of formal sources of loans. It checks whether banks are working properly and following the required rules.

The RBI:

• monitors whether banks maintain the minimum cash balance out of the deposits they receive.
• checks that banks give loans not only to profit-making businesses and traders, but also to small cultivators, small-scale industries and small borrowers.
• requires banks to submit information about how much they are lending, to whom they are lending and at what interest rate.

This supervision is necessary to ensure that banks provide loans to different sections of people and not only to profit-making businesses and traders. It also helps ensure that banks maintain the required cash balance.

9. Analyse the role of credit for development.
Ans: Credit plays an important role in economic activities and development. However, its effect can be positive or negative depending on the situation. In Salim’s case, credit helped him meet the expenses of production. He used the money to hire workers and purchase raw materials. He completed the order on time, made a good profit and repaid the money he had borrowed. Thus, credit helped him increase his earnings. In Swapna’s case, credit had a negative effect. Her crop failed because of pests, and she could not repay her loan. Her debt increased, and she had to take another loan. Finally, she had to sell part of her land to repay the debt. Thus, she fell into a debt trap. Therefore, credit can help development when it helps increase earnings, but in risky situations it can make the borrower worse off.

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.
Ans: Manav should compare the terms of credit offered by the bank and the moneylender before deciding where to borrow.

He should consider:

• Interest rate: He should see how much interest he has to pay on the loan.
• Collateral: He should find out whether the lender requires an asset as a guarantee.
• Documentation requirement: He should consider the documents required for getting the loan.
• Mode of repayment: He should check how and when the loan has to be repaid.

Bank loans generally come under the formal sector, while moneylenders are part of the informal sector. Informal lenders generally charge a much higher interest rate. A high cost of borrowing can leave less income with the borrower and may lead to increasing debt. Therefore, Manav should consider these terms and choose a source where the loan is available at a reasonable cost and the terms of credit are suitable for him.

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?
Ans: Banks may be unwilling to lend to some small farmers because getting a bank loan requires proper documents and collateral. Small farmers may not have sufficient assets that can be used as collateral. The absence of collateral is one of the major reasons that prevents poor people from getting bank loans. Therefore, the requirements of banks can make it difficult for small farmers to obtain loans.

(b) What are the other sources from which the small farmers can borrow?
Ans: Small farmers can borrow from informal sources.

These include:

• Moneylenders 
• Traders 
• Employers 
• Relatives 
• Friends 

They may approach moneylenders because moneylenders know the borrowers personally and may provide loans without collateral. However, informal lenders generally charge a much higher interest on loans.

(c) Explain with an example how the terms of credit can be unfavourable for the small farmer.
Ans: The terms of credit can be unfavourable when the borrower has to pay a very high interest rate. For example, Swapna, a small farmer, took a loan from a moneylender for cultivation. Her crop was attacked by pests and failed. She could not repay the loan, so her debt increased. The next year, she took another loan, but her earnings were not enough to cover the old loan. She was caught in debt and finally had to sell part of her land to pay off the debt. This shows how unfavourable terms of credit and crop failure can push a small farmer into a debt trap.

(d) Suggest some ways by which small farmers can get cheap credit.
Ans: Small farmers can get cheaper credit if they have greater access to formal sources of credit such as banks and cooperative societies. Banks and cooperative societies need to increase their lending, particularly in rural areas. Poor people should also receive a greater share of formal loans. Self-Help Groups (SHGs) can also help poor people get loans. Members save regularly and can take small loans from the group at an interest rate that is less than what moneylenders charge. After one or two years of regular savings, the group becomes eligible for a bank loan. Thus, increasing formal sector credit and making it available to poor people can help reduce dependence on expensive informal credit.

12. Fill in the blanks:

(i) Majority of the credit needs of the _________________ households are met from informal sources. (Poor)
(ii) _________________ costs of borrowing increase the debt-burden. (Additional)
(iii) _________________ issues currency notes on behalf of the Central Government. (Reserve Bank of India)
(iv) Banks charge a higher interest rate on loans than what they offer on _________________. (Deposits)
(v) _________________ is an asset that the borrower owns and uses as a guarantee until the loan is repaid to the lender. (Collateral)

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.

Ans: (b) Members

(ii) Formal sources of credit does not include
(a) Banks.
(b) Cooperatives.
(c) Employers.

Ans: (c) Employers

2. Extra Questions and Answers

2A. Multiple Choice Questions (MCQs)

1. What is the main difficulty of the barter system?
(a) Lack of goods
(b) Double coincidence of wants
(c) Lack of markets
(d) Lack of production

Ans: (b) Double coincidence of wants

2. What acts as an intermediate in the exchange process?
(a) Barter
(b) Credit
(c) Money
(d) Collateral

Ans: (c) Money

3. Money is called a medium of exchange because it:
(a) can be used only in banks
(b) helps in buying and selling goods and services
(c) can be used only by traders
(d) is made only of precious metals

Ans: (b) helps in buying and selling goods and services

4. Which of the following was used as money in India in early ages?
(a) Cheques
(b) Grains and cattle
(c) Bank deposits
(d) Credit cards

Ans: (b) Grains and cattle

5. Who issues currency notes in India on behalf of the Central Government?
(a) State Bank
(b) Reserve Bank of India
(c) Cooperative societies
(d) Moneylenders

Ans: (b) Reserve Bank of India

6. Which of the following is a modern form of money?
(a) Cattle
(b) Grains
(c) Currency
(d) Wheat

Ans: (c) Currency

7. Banks keep about what proportion of their deposits as cash?
(a) 5 per cent
(b) 10 per cent
(c) 25 per cent
(d) 50 per cent

Ans: (a) 5 per cent

8. Why do banks keep cash with themselves?
(a) To buy goods
(b) To pay depositors who may withdraw money
(c) To give money to traders
(d) To buy land

Ans: (b) To pay depositors who may withdraw money

9. Banks act as a link between:
(a) traders and farmers
(b) depositors and borrowers
(c) workers and employers
(d) producers and consumers

Ans: (b) depositors and borrowers

10. Banks charge a higher interest rate on:
(a) deposits
(b) loans
(c) savings
(d) currency

Ans: (b) loans

11. The difference between the interest charged on loans and the interest paid on deposits is the main source of:
(a) borrowers’ income
(b) banks’ income
(c) farmers’ income
(d) government income

Ans: (b) banks’ income

12. Assertion (A): Money removes the problem of double coincidence of wants.
Reason (R): Money acts as a medium of exchange.
(a) Both A and R are true, and R is the correct explanation of A.
(b) Both A and R are true, but R is not the correct explanation of A.
(c) A is true, but R is false.
(d) A is false, but R is true.

Ans: (a) Both A and R are true, and R is the correct explanation of A.

13. Assertion (A): Demand deposits are considered money in the modern economy.
Reason (R): Payments can be made through cheques against demand deposits.
(a) Both A and R are true, and R is the correct explanation of A.
(b) Both A and R are true, but R is not the correct explanation of A.
(c) A is true, but R is false.
(d) A is false, but R is true.

Ans: (a) Both A and R are true, and R is the correct explanation of A.

14. Assertion (A): Banks keep only a small proportion of their deposits as cash.
Reason (R): Only some depositors come to withdraw cash on a particular day.
(a) Both A and R are true, and R is the correct explanation of A.
(b) Both A and R are true, but R is not the correct explanation of A.
(c) A is true, but R is false.
(d) A is false, but R is true.

Ans: (a) Both A and R are true, and R is the correct explanation of A.

15. Assertion (A): Banks act as intermediaries between depositors and borrowers.
Reason (R): Banks use the major portion of their deposits to extend loans.
(a) Both A and R are true, and R is the correct explanation of A.
(b) Both A and R are true, but R is not the correct explanation of A.
(c) A is true, but R is false.
(d) A is false, but R is true.

Ans: (a) Both A and R are true, and R is the correct explanation of A.

16. Assertion (A): Credit always makes the borrower better off.
Reason (R): Credit can sometimes push a borrower into a debt trap.
(a) Both A and R are true, and R is the correct explanation of A.
(b) Both A and R are true, but R is not the correct explanation of A.
(c) A is true, but R is false.
(d) A is false, but R is true.

Ans: (d) A is false, but R is true.

17. Assertion (A): Informal lenders usually charge a higher interest on loans.
Reason (R): There is no organisation that supervises the credit activities of informal lenders.
(a) Both A and R are true, and R is the correct explanation of A.
(b) Both A and R are true, but R is not the correct explanation of A.
(c) A is true, but R is false.
(d) A is false, but R is true.

Ans: (a) Both A and R are true, and R is the correct explanation of A.

18. Which statement correctly differentiates between a barter system and an economy using money?
(a) Barter uses money, while an economy using money does not.
(b) Barter requires double coincidence of wants, while money removes this need.
(c) Both require double coincidence of wants.
(d) Neither requires an exchange.

Ans: (b) Barter requires double coincidence of wants, while money removes this need.

19. Which of the following correctly differentiates between currency and demand deposits?
(a) Currency is paper notes and coins, while demand deposits are deposits that can be withdrawn on demand.
(b) Currency can never be used for payment, while demand deposits can.
(c) Currency is issued by moneylenders, while demand deposits are issued by traders.
(d) Both are forms of cattle money.

Ans: (a) Currency is paper notes and coins, while demand deposits are deposits that can be withdrawn on demand.

20. Which statement correctly differentiates between formal and informal sources of credit?
(a) Banks are informal sources, while moneylenders are formal sources.
(b) Banks and cooperatives are formal sources, while moneylenders and traders are informal sources.
(c) Both are supervised by the RBI.
(d) Both charge the same interest rate.

Ans: (b) Banks and cooperatives are formal sources, while moneylenders and traders are informal sources.

21. Which statement correctly differentiates between Salim’s and Swapna’s credit situations?
(a) Credit helped both in the same way.
(b) Credit helped Salim increase his earnings, while Swapna’s credit pushed her into a debt trap.
(c) Salim and Swapna both sold land to repay loans.
(d) Neither used credit for production.

Ans: (b) Credit helped Salim increase his earnings, while Swapna’s credit pushed her into a debt trap.

Read the following and answer Questions.
Salim is a shoe manufacturer. He receives an order for 3,000 pairs of shoes to be delivered within a month. He needs money to hire more workers and purchase raw materials. He gets leather from a supplier with a promise to pay later. He also receives cash as an advance payment from the large trader. Salim completes the order, makes a good profit and repays the borrowed money.

22. Why did Salim need credit?
(a) To buy a house
(b) To meet production expenses
(c) To repay an old loan
(d) To purchase land

Ans: (b) To meet production expenses

23. What did Salim do with the credit?
(a) He stopped production.
(b) He hired workers and purchased raw materials.
(c) He sold his land.
(d) He deposited all the money in a bank.

Ans: (b) He hired workers and purchased raw materials.

24. What was the outcome of Salim’s credit?
(a) He fell into a debt trap.
(b) He made a good profit and repaid the borrowed money.
(c) He lost his business.
(d) He had to sell his shoes.

Ans: (b) He made a good profit and repaid the borrowed money.

25. What role did credit play in Salim’s situation?
(a) Negative role
(b) Positive role
(c) No role
(d) It increased his old debt

Ans: (b) Positive role

26. Salim’s situation shows that credit can:
(a) help meet ongoing expenses and increase earnings
(b) always create debt
(c) never be used for production
(d) only be taken from moneylenders

Ans: (a) help meet ongoing expenses and increase earnings

27. SHGs mainly organise:
(a) rural poor, particularly women
(b) only traders
(c) only large farmers
(d) only employers

Ans: (a) rural poor, particularly women

28. How much may each SHG member save?
(a) Rs 5 to Rs 10
(b) Rs 25 to Rs 100 or more
(c) Rs 500 to Rs 1,000 only
(d) Rs 2,000 or more

Ans: (b) Rs 25 to Rs 100 or more

29. What can SHG members do with the group’s savings?
(a) Take small loans from the group
(b) Issue currency notes
(c) Open a bank
(d) Give loans only to traders

Ans: (a) Take small loans from the group

30. Who takes most important decisions regarding SHG savings and loans?
(a) Bank
(b) Group members
(c) Moneylender
(d) Trader

Ans: (b) Group members

31. Why are banks willing to lend to SHGs even without collateral?
(a) The bank does not require repayment.
(b) The group is responsible for repayment.
(c) The moneylender repays the loan.
(d) The government repays every loan.

Ans: (b) The group is responsible for repayment

32. Which of the following is a benefit of SHGs?
(a) They charge higher interest than moneylenders.
(b) They help borrowers overcome the problem of lack of collateral.
(c) They prevent people from saving.
(d) They provide loans only to rich households.

Ans: (b) They help borrowers overcome the problem of lack of collateral

33. SHGs also provide a platform to discuss issues such as:
(a) health, nutrition and domestic violence
(b) currency printing only
(c) bank cash balance only
(d) metallic coins only

Ans: (a) health, nutrition and domestic violence

34. Which of the following is not an informal source of credit?
(a) Moneylender
(b) Trader
(c) Employer
(d) Cooperative society

Ans: (d) Cooperative society

2B. Very Short Type Questions and Answers

1. What is a barter system?
Ans: A barter system is a system in which goods are directly exchanged for other goods without using money. In this system, a person has to find someone who wants to buy what he or she wants to sell and also has something that the person wants to buy. Therefore, double coincidence of wants is necessary.

2. What is double coincidence of wants?
Ans: Double coincidence of wants means that what one person wants to sell is exactly what the other person wants to buy. It is an essential feature of the barter system. For example, a shoe manufacturer who wants wheat must find a farmer who wants to buy shoes and sell wheat in exchange.

3. Why is money called a medium of exchange?
Ans: Money is called a medium of exchange because it acts as an intermediate in the exchange process. A person can first sell a commodity and receive money. The person can then use that money to purchase another commodity. Thus, money removes the need for double coincidence of wants.

4. Name two things that were used as money in early India.
Ans: In the early ages, grains and cattle were used as money in India. Later, people started using metallic coins made of gold, silver and copper. The use of these metallic coins continued well into the last century.

5. What are the modern forms of money?
Ans: The modern forms of money are currency and deposits with banks. Currency includes paper notes and coins, while deposits with banks include money that people keep in their bank accounts. Both currency and deposits are closely linked to the working of the modern banking system.

6. What does modern currency include?
Ans: Modern currency includes paper notes and coins. Unlike earlier forms of money, modern currency is not made of precious metals such as gold, silver and copper. It also does not have any use of its own like grains and cattle had. It is accepted because it is authorised by the government.

7. Why is modern currency accepted as a medium of exchange?
Ans: Modern currency is accepted as a medium of exchange because it is authorised by the government of the country. In India, the Reserve Bank of India issues currency notes on behalf of the central government. Indian law also legalises the use of the rupee as a medium of payment.

8. Who issues currency notes in India?
Ans: In India, the Reserve Bank of India (RBI) issues currency notes on behalf of the central government. As per Indian law, no other individual or organisation is allowed to issue currency. The rupee is therefore widely accepted as a medium of exchange in India.

9. What is a demand deposit?
Ans: A bank deposit that can be withdrawn on demand is called a demand deposit. People can keep their extra money in bank accounts and withdraw it whenever they require it. Demand deposits also have an important feature of money because payments can be made through cheques against them.

10. What is a cheque?
Ans: A cheque is a paper instructing the bank to pay a specific amount from the account of the person making the payment to the person in whose name the cheque has been issued. It allows payments to be made directly without using cash.

11. Why are demand deposits considered money?
Ans: Demand deposits are considered money because they can be withdrawn on demand and payments can be made through cheques against them. Since demand deposits are widely accepted as a means of payment along with currency, they constitute money in the modern economy.

12. What is the role of banks in modern money?
Ans: Banks play an important role in modern money. People deposit their extra money in banks, and banks provide loans from these deposits. Banks also make it possible to settle payments through cheques against demand deposits. Thus, modern forms of money—currency and deposits—are closely linked to the banking system.

13. What is the main source of income of banks?
Ans: The difference between the interest charged from borrowers and the interest paid to depositors is the main source of income of banks. Banks charge a higher interest rate on loans than what they offer on deposits. This difference provides income to the banks.

14. What is a debt trap?
Ans: A debt trap is a situation in which credit pushes the borrower into a situation from which recovery is very painful. In Swapna’s case, the crop failure made loan repayment impossible. Her debt increased, she took another loan, and finally she had to sell part of her land to repay the debt.

15. What is collateral?
Ans: Collateral is an asset that the borrower owns and uses as a guarantee to the lender until the loan is repaid. Land, buildings, vehicles, livestock and deposits with banks are examples of assets that can be used as collateral. If the borrower fails to repay the loan, the lender can sell the collateral to obtain payment.

16. Name the formal sources of credit.
Ans: The formal sources of credit are banks and cooperative societies. The Reserve Bank of India supervises the functioning of formal sources of loans. Formal sources provide credit under specified terms of credit and are supervised by the RBI.

17. Name some informal sources of credit.
Ans: Informal sources of credit include moneylenders, traders, employers, relatives and friends. There is no organisation that supervises the credit activities of informal lenders. They can lend at whatever interest rate they choose.

18. Who supervises the formal sources of loans?
Ans: The Reserve Bank of India (RBI) supervises the functioning of formal sources of loans. It monitors banks in maintaining the required cash balance and checks that banks give loans to different borrowers, including small cultivators, small-scale industries and small borrowers.

19. Why do informal lenders charge higher interest?
Ans: There is no organisation that supervises the credit activities of informal lenders. They can lend at whatever interest rate they choose and there is no one to stop them from using unfair means to get their money back. Therefore, most informal lenders charge a much higher interest on loans.

20. What is a Self-Help Group?
Ans: A Self-Help Group (SHG) is a small group of rural poor people, particularly women, who come together and pool their savings. A typical SHG has 15–20 members, usually belonging to one neighbourhood. Members meet and save regularly and can take small loans from the group.

21. How much does an SHG member usually save?
Ans: Saving per member in an SHG varies from Rs 25 to Rs 100 or more, depending on the ability of the person to save. The members save regularly and pool their savings. This collected money can then be used to provide small loans to members who need them.

22. What is the main purpose of SHGs?
Ans: The main purpose of SHGs is to organise the rural poor, particularly women, and help them save regularly and obtain small loans. Members can borrow from the group at an interest rate that is less than what moneylenders charge. SHGs also help borrowers overcome the problem of lack of collateral.

23. When does an SHG become eligible for a bank loan?
Ans: If an SHG is regular in its savings, it becomes eligible for a bank loan after one or two years. The loan is sanctioned in the name of the group and is meant to create self-employment opportunities for its members.

24. Who takes the important decisions in an SHG?
Ans: Most important decisions regarding savings and loan activities are taken by the group members. The group decides the purpose and amount of the loan, the interest to be charged and the repayment schedule. The group is also responsible for the repayment of the loan.

25. How do SHGs help women?
Ans: SHGs help women become financially self-reliant by helping them save regularly and obtain loans for different needs. The regular meetings of the group also provide a platform to discuss and act on social issues such as health, nutrition and domestic violence.

2C. Short Answer-type Questions

1. What is credit? How can it affect a person?
Ans: Credit or loan is an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payment. Credit can have a positive or negative effect. In Salim’s case, credit helped him complete production, increase his earnings and repay the loan. In Swapna’s case, crop failure made repayment difficult and pushed her into a debt trap.

2. What is a debt trap? Explain with Swapna’s example.
Ans: A debt trap is a situation in which credit pushes the borrower into debt from which recovery is very painful. Swapna’s crop failed, so she could not repay her loan. Her debt increased, and she had to take a fresh loan the next year. Her earnings were not enough to cover the old loan. Finally, she had to sell part of her land to repay the debt.

3. What are the terms of credit?
Ans: Every loan agreement has certain conditions called the terms of credit. They include the interest rate, collateral, documentation requirement and mode of repayment. These terms can vary from one credit arrangement to another. They may also vary depending on the nature of the lender and the borrower. The borrower has to consider these terms while taking a loan.

4. What is collateral? Why is it required for a loan?
Ans: Collateral is an asset that the borrower owns and uses as a guarantee to the lender until the loan is repaid. Land, buildings, vehicles, livestock and deposits with banks can be used as collateral. If the borrower fails to repay the loan, the lender has the right to sell the asset or collateral to obtain payment. Thus, collateral acts as a guarantee for the lender.

5. Explain the difference between formal and informal sources of credit.
Ans: The formal sources of credit include banks and cooperative societies. Their functioning is supervised by the Reserve Bank of India. Informal sources include moneylenders, traders, employers, relatives and friends. There is no organisation that supervises the credit activities of informal lenders. Most informal lenders charge a much higher interest on loans than formal lenders, making borrowing more costly for the borrower.

6. Why do poor households depend more on informal sources of credit?
Ans: Poor households often depend on informal sources because banks are not present everywhere in rural India. Even where banks are present, getting a loan is more difficult because banks require proper documents and collateral. Poor people often do not have collateral. Moneylenders may give loans without collateral because they know the borrowers personally. However, they usually charge very high interest and may harass poor borrowers.

7. What is the role of the Reserve Bank of India in supervising banks?
Ans: The Reserve Bank of India (RBI) supervises the functioning of formal sources of loans. It monitors whether banks maintain the required cash balance out of the deposits they receive. It also sees that banks give loans not only to profit-making businesses and traders but also to small cultivators, small-scale industries and small borrowers. Banks have to provide information to the RBI about their lending.

8. Why should poor people receive a greater share of formal loans?
Ans: At present, richer households receive more credit from formal sources, while poor households depend more on informal sources. Informal loans usually carry a high interest rate, so poor borrowers have to pay more for borrowing. It is therefore important that formal credit is distributed more equally. This will allow poor people to benefit from cheaper loans and reduce their dependence on informal sources of credit.

9. What are Self-Help Groups? How do they help the poor?
Ans: Self-Help Groups organise the rural poor, particularly women, into small groups and collect their savings. A typical SHG has 15–20 members who meet and save regularly. Members can take small loans from the group at an interest rate lower than that charged by moneylenders. After one or two years of regular savings, the group can become eligible for a bank loan. SHGs help borrowers overcome the problem of lack of collateral.

10. How do Self-Help Groups help women become financially self-reliant?
Ans: SHGs help women by organising them into small groups where they save regularly and take small loans when needed. The loans can be used for different purposes, including working capital needs and acquiring assets such as sewing machines, handlooms and cattle. The group members take important decisions about loans and savings. Regular meetings also provide a platform to discuss social issues such as health, nutrition and domestic violence.

11. Why are banks willing to give loans to SHGs even without collateral?
Ans: Banks are willing to lend to SHGs even when members do not have collateral because the group is responsible for repayment of the loan. The group decides the purpose and amount of the loan, interest to be charged and repayment schedule. If any member fails to repay the loan, other members seriously follow up the matter. Because of this feature, banks are willing to lend to poor women organised in SHGs.

12. Explain the importance of cheap and affordable credit.
Ans: Cheap and affordable credit is important because it allows people to borrow money at a lower cost for different needs. People can use such credit to grow crops, do business, set up small-scale industries, set up new industries and trade in goods. It can help increase incomes. Therefore, banks and cooperative societies need to increase their lending, particularly in rural areas, so that people can get cheaper loans.

13. Why is formal credit important for the development of the country?
Ans: Formal credit is important because it provides loans through banks and cooperative societies. More formal credit can reduce people’s dependence on expensive informal sources. With cheaper loans, people can grow crops, do business, set up small-scale industries and trade in goods. It is also important that poor people receive a greater share of formal loans. Both increasing formal credit and making it available to the poor are important for development.

14. What is the basic idea behind Self-Help Groups for the poor?
Ans: The basic idea is to organise the rural poor, especially women, into small groups and pool their savings. Members save regularly and can take small loans from the group at a reasonable interest rate. If the group continues regular savings for one or two years, it can become eligible for a bank loan. In this way, SHGs help poor people get timely credit and overcome the problem of lack of collateral.

15. Why is modern currency different from earlier forms of money?
Ans: Earlier forms of money included grains, cattle and metallic coins made of gold, silver and copper. Modern currency consists of paper notes and coins. Modern currency is not made of precious metals and does not have any use of its own. It is accepted because it is authorised by the government.

16. Why do people deposit their extra cash in banks?
Ans: People need only some currency for their day-to-day needs. They can deposit their extra cash in a bank by opening a bank account. The money remains safe in the bank and the bank also pays an amount as interest on the deposits. People can withdraw the money whenever they require it.

17. Why do banks provide loans?
Ans: There is a huge demand for loans for different economic activities. Banks use the major portion of the deposits they receive to meet the loan requirements of people. In this way, banks make funds available to people who need them.

18. Why do banks charge more interest on loans than on deposits?
Ans: Banks pay interest to people who keep deposits with them and charge interest from people who take loans. The interest charged on loans is higher than the interest offered on deposits. The difference between the two is the main source of income of banks.

19. What is meant by the principal of a loan?
Ans: The chapter explains that a borrower has to pay an interest rate along with the repayment of the principal. The principal refers to the amount of the loan that has to be repaid to the lender, along with the interest according to the loan agreement.

20. Why are crop loans generally taken at the beginning of the season?
Ans: Crop production involves expenses on seeds, fertilisers, pesticides, water, electricity and repair of equipment. Farmers need money for these expenses before they receive income from the crop. Therefore, they usually take crop loans at the beginning of the season and repay them after the harvest.

21. Why is repayment of a crop loan dependent on farming income?
Ans: Farmers usually receive income from their crops only after the harvest. There is normally a period of three to four months between buying the inputs and selling the crop. Therefore, farmers depend on the income from farming to repay the loan after the harvest.

22. Why can the terms of credit differ from one loan arrangement to another?
Ans: The terms of credit can vary substantially from one credit arrangement to another. They may depend on the nature of the lender and the borrower. Interest rate, collateral, documentation requirement and mode of repayment can therefore be different in different loan arrangements.

23. What does the urban credit pattern tell us about poor and rich households?
Ans: In urban areas, 54 per cent of loans taken by poor households come from informal sources. Among rich urban households, only 17 per cent of their loans come from informal sources, while 83 per cent come from formal sources. This shows that rich households have greater access to formal credit.

24. Why can moneylenders give loans without collateral?
Ans: Moneylenders often know the borrowers personally. Because of this, they may be willing to give loans without requiring collateral. Borrowers can also sometimes approach moneylenders again even without repaying their earlier loans. However, moneylenders generally charge very high interest.

25. What are the disadvantages of borrowing from moneylenders?
Ans: Moneylenders generally charge very high rates of interest. They may keep no records of the transactions and may harass poor borrowers. The high cost of borrowing can use up a large part of the borrower’s earnings and may increase the debt.

26. Why are SHGs called the building blocks of organisation of the rural poor?
Ans: SHGs organise rural poor people, particularly women, into small groups. Members meet regularly, save money and take decisions about loans and savings. They also discuss and act on social issues such as health, nutrition and domestic violence. Therefore, SHGs help organise the rural poor.

27. What type of loans are given to SHG members?
Ans: Members can take small loans from the group itself to meet their needs. Loans can be used for releasing mortgaged land, meeting working capital needs, buying seeds, fertilisers and raw materials, buying housing materials and acquiring assets such as sewing machines, handlooms and cattle.

28. What is the purpose of bank loans given to SHGs?
Ans: The bank loan is sanctioned in the name of the group and is meant to create self-employment opportunities for the members. The loan can help members meet working capital needs and acquire assets such as sewing machines, handlooms and cattle.

2D. Case/Source-based Questions and Answers

Case/Source-Based Question 1: Money as a Medium of Exchange

Read the source carefully and answer the questions that follow:
A shoe manufacturer wants to sell the shoes he has produced and buy wheat. In a barter system, he would have to find a wheat-growing farmer who not only wants to sell wheat but also wants to buy shoes from him. Both persons would have to agree to sell and buy each other’s commodities. This is called double coincidence of wants. When money is used, the shoe manufacturer can first exchange his shoes for money and then use the money to purchase wheat. Money therefore acts as an intermediate in the exchange process and is called a medium of exchange.

(a) What is a barter system?
Ans: A barter system is a system in which goods are directly exchanged for other goods without using money. In this system, a person has to find another person who is willing to exchange the required commodity. For example, a shoe manufacturer who wants wheat must find a farmer who has wheat and is also willing to take shoes in exchange. Thus, both persons must agree to exchange their goods directly. The barter system can create difficulty because finding a person with exactly the required commodity and matching needs may not always be easy.

(b) What is meant by double coincidence of wants?
Ans: Double coincidence of wants means that both persons involved in an exchange must want each other’s goods at the same time. For example, if a shoe manufacturer wants wheat, he must find a wheat farmer who not only has wheat but also wants to buy shoes. Only when both persons need what the other has can the exchange take place. This makes barter difficult because such a situation may not always exist. Money removes this difficulty by acting as an intermediate in the exchange process.

(c) How does money remove this difficulty?
Ans: Money removes the difficulty of double coincidence of wants by acting as an intermediate in the process of exchange. A person does not have to find someone who wants exactly what he wants to sell. For example, the shoe manufacturer can first sell his shoes and receive money. He can then use that money to buy wheat from a farmer. The farmer does not need to buy shoes from him. Therefore, money makes buying and selling easier and allows people to exchange goods and services without depending on a direct exchange of commodities.

(d) Why is money called a medium of exchange?
Ans: Money is called a medium of exchange because it is used as an intermediate in the buying and selling of goods and services. A person can sell a commodity and receive money in return. He can then use the same money to purchase another commodity that he needs. For example, a shoe manufacturer can sell shoes for money and use that money to buy wheat. In this way, money removes the difficulty of finding someone who wants to exchange goods directly. It makes the process of exchange simple, convenient and easier for everyone.

Case/Source-Based Question 2: Modern Forms of Money

Read the source carefully and answer the questions that follow:
Before the introduction of coins, different objects were used as money. In India, people used grains and cattle as money from very early ages. Later, metallic coins made of gold, silver and copper came into use. Modern forms of money include currency, such as paper notes and coins. Modern currency is not made of precious metals and does not have any use of its own. It is accepted as a medium of exchange because it is authorised by the government. In India, the Reserve Bank of India issues currency notes on behalf of the central government.

(a) Name two things that were used as money in early India.
Ans: In early India, grains and cattle were used as forms of money. Before modern currency developed, people used different objects for carrying out exchanges. Grains could be exchanged for other goods, while cattle were also considered valuable and could be used in transactions. These forms of money were different from today’s paper notes and coins. Over time, people started using metallic coins made of gold, silver and copper. Later, modern forms of money such as currency and bank deposits became common. Thus, the use of money changed according to the needs and development of society.

(b) Which metals were used for making coins?
Ans: Coins were made of gold, silver and copper. Before modern currency came into use, metallic coins were widely used as money. These metals were valuable and were accepted by people for buying and selling goods. Gold and silver were especially valuable, while copper was also used for making coins. The use of metallic coins was an important development from earlier forms of money such as grains and cattle. Later, paper currency and coins that are not made of precious metals became common as modern forms of money. Their value depends mainly on government authorisation and acceptance.

(c) What are the modern forms of money mentioned in the chapter?
Ans: The modern forms of money mentioned in the chapter are currency and deposits with banks. Currency includes paper notes and coins that are used for making payments in daily life. Bank deposits, especially demand deposits, can also be used for making payments. People deposit their money in banks and can withdraw it when required. They can also make payments through cheques. Thus, money in the modern economy is not limited to physical notes and coins. Currency and bank deposits together make buying, selling and making payments easier in the modern economy.

(d) Who issues currency notes in India?
Ans: The Reserve Bank of India (RBI) issues currency notes in India on behalf of the central government. Modern currency is not made of precious metals and does not have any independent use of its own. It is accepted because it is authorised by the government and people have confidence in it. The RBI plays an important role in the currency system of the country. Therefore, people can use the notes issued through the authorised system for buying goods and services and for making different types of payments in the economy.

Case/Source-Based Question 3: Demand Deposits and Cheques

Read the source carefully and answer the questions that follow:
People need only some currency for their day-to-day needs. They deposit their extra cash in banks by opening bank accounts. Banks accept these deposits and pay an amount as interest. People can withdraw the money whenever they require it. Since bank deposits can be withdrawn on demand, they are called demand deposits. Payments can also be made through cheques. A cheque instructs the bank to pay a specific amount from one person’s account to another person. Since demand deposits are widely accepted as a means of payment along with currency, they constitute money in the modern economy.

(a) Why do people deposit extra cash in banks?
Ans: People deposit their extra cash in banks because they do not need to keep all their money with them for daily expenses. Banks keep the deposited money safely and also pay an amount as interest on deposits. People can withdraw their money whenever they require it. Keeping money in a bank also makes it easier to make payments through banking facilities. Thus, bank deposits provide safety and convenience to people. The money deposited in banks can also be used for different transactions, making bank deposits an important part of the modern monetary system.

(b) What are demand deposits?
Ans: Bank deposits that can be withdrawn on demand are called demand deposits. People keep their extra money in bank accounts and can take it out whenever they need it. Unlike money kept for a fixed period, demand deposits do not require a person to wait for a particular date before withdrawing the money. These deposits are also useful for making payments through cheques. Since people can use demand deposits for making payments and can withdraw them when required, they are considered an important part of money in the modern economy.

(c) What is a cheque?
Ans: A cheque is a written instruction given by an account holder to the bank to pay a specific amount of money from his or her account to another person. It allows a person to make a payment without directly using cash. For example, a buyer can give a cheque to a seller, and the seller can deposit it in the bank. The bank then transfers the specified amount from the buyer’s account according to the cheque. Therefore, cheques make payments convenient and allow demand deposits to be used as a means of payment.

(d) Why do demand deposits constitute money?
Ans: Demand deposits constitute money because they can be withdrawn whenever required and can also be used for making payments. People can use cheques to make payments from their bank accounts instead of using physical currency. Since demand deposits are widely accepted as a means of payment along with currency, they are considered part of money in the modern economy. They provide people with an easy and convenient way to keep and use their money. Thus, both currency and demand deposits play an important role in carrying out economic transactions.

Case/Source-Based Question 4: Loan Activities of Banks

Read the source carefully and answer the questions that follow:
Banks keep only a small proportion of their deposits as cash. In India, banks these days hold about 5 per cent of their deposits as cash. This cash is kept to pay depositors who may come to withdraw money on any given day. Since only some depositors come to withdraw cash on a particular day, the bank is able to manage with this cash. Banks use the major portion of their deposits to extend loans. In this way, banks mediate between those who have surplus funds and those who need funds.

(a) How much of their deposits do banks in India these days hold as cash?
Ans: Banks in India these days hold about 5 per cent of their deposits as cash. This cash is kept mainly to meet the needs of depositors who may come to withdraw money on a particular day. Banks do not need to keep all the deposited money as cash because all depositors do not usually withdraw their money at the same time. Therefore, keeping a small proportion as cash is enough to meet normal withdrawal requirements. The remaining deposits can be used by banks for other activities, especially for providing loans.

(b) Why do banks keep this cash?
Ans: Banks keep cash to meet the needs of depositors who may come to withdraw money on any given day. People deposit their money in banks with the expectation that they can withdraw it whenever they need it. However, all depositors do not usually demand their money at the same time. Therefore, banks keep only a small proportion of their deposits as cash. In India, banks these days hold about 5 per cent of their deposits as cash. This allows banks to manage withdrawals while using the major portion of deposits for extending loans.

(c) What do banks do with the major portion of their deposits?
Ans: Banks use the major portion of their deposits to extend loans to people who need funds. People deposit their surplus money in banks, while many individuals and businesses require money for different purposes. Banks collect deposits from people and provide loans to borrowers. In this way, the deposited money is put to productive use rather than remaining unused. Banks earn interest from the loans they provide and also pay interest on deposits. Therefore, lending is an important activity through which banks connect people who have surplus funds with those who need funds.

(d) How do banks mediate between depositors and borrowers?
Ans: Banks mediate between depositors and borrowers by accepting deposits from people who have surplus funds and using the major portion of these deposits to provide loans to people who need funds. Depositors keep their money in banks and receive interest, while borrowers obtain money from banks and repay it with interest. In this way, banks act as a link between the two groups. They collect scattered savings from depositors and make these funds available to borrowers. Thus, banks play an important role in transferring funds from people who have extra money to those who need it.

Case/Source-Based Question 5: Credit and Salim

Read the source carefully and answer the questions that follow:
Salim, a shoe manufacturer, receives an order for 3,000 pairs of shoes to be delivered within a month. To complete the production on time, he needs to hire more workers and purchase raw materials. He gets leather from a supplier with a promise to pay later. He also obtains cash as an advance payment from the large trader for 1,000 pairs of shoes. At the end of the month, Salim delivers the order, makes a good profit and repays the money he had borrowed. Credit therefore plays a vital and positive role in this situation.

(a) Why did Salim need credit?
Ans: Salim needed credit because he received a large order for 3,000 pairs of shoes that had to be completed within one month. To complete the order on time, he needed money to hire additional workers and purchase the required raw materials. He obtained leather from a supplier with a promise to pay later and also received an advance payment from the large trader for 1,000 pairs of shoes. Thus, credit helped Salim arrange the necessary resources before receiving the full payment. It allowed him to continue production and complete the order on time.

(b) From whom did Salim obtain credit?
Ans: Salim obtained credit from two sources: the leather supplier and the large trader. The leather supplier provided him with leather on the promise that Salim would make the payment later. This allowed Salim to obtain the raw material without paying immediately. He also received cash as an advance payment from the large trader for 1,000 pairs of shoes. These two forms of credit helped him arrange the resources needed to complete his large order. Therefore, credit from both the supplier and trader supported Salim’s production activities.

(c) What was the outcome of the credit taken by Salim?
Ans: The credit taken by Salim had a positive outcome. It helped him arrange additional workers and raw materials required to complete the order of 3,000 pairs of shoes within one month. He was able to produce and deliver the shoes on time. After completing the order, Salim made a good profit. He then used his earnings to repay the money he had borrowed. This shows that credit can be useful when it is used for productive activities and when the borrower is able to earn enough income to repay the loan.

(d) Why was credit useful in Salim’s situation?
Ans: Credit was useful in Salim’s situation because it helped him meet the expenses of production before he received the full payment for his order. He needed money and raw materials to increase production and complete the large order within the given time. The leather supplier allowed him to pay later, while the trader provided an advance payment. With this support, Salim completed the order, earned a good profit and repaid the borrowed money. Thus, credit helped him expand his production, complete the work on time and increase his earnings.

Case/Source-Based Question 6: Swapna and Debt Trap

Read the source carefully and answer the questions that follow:
Swapna, a small farmer, grows groundnut on three acres of land. She takes a loan from a moneylender to meet the expenses of cultivation. Midway through the season, the crop is hit by pests and fails. She uses expensive pesticides, but they make little difference. She cannot repay the moneylender and her debt grows into a large amount. The next year, she takes another loan for cultivation. Although the crop is normal, her earnings are not enough to cover the old loan. She gets caught in debt and has to sell part of her land to pay off the debt.

(a) Why did Swapna take a loan?
Ans: Swapna took a loan from the moneylender to meet the expenses of cultivation. As a small farmer growing groundnut on three acres of land, she needed money to carry out farming activities. She borrowed money with the expectation that her crop would provide enough income to repay the loan. However, the crop was attacked by pests and failed. She spent money on expensive pesticides, but they did not help much. As a result, she could not earn enough money from the crop and was unable to repay the loan on time.

(b) Why could she not repay the loan?
Ans: Swapna could not repay the loan because her groundnut crop was attacked by pests and failed. She had expected the crop to provide enough income to meet her loan repayment and other expenses. When the crop failed, she lost the expected earnings. She also spent money on expensive pesticides, but they made little difference. Therefore, she did not have enough income to repay the moneylender. Her financial problem became more serious because she had to borrow again the following year for cultivation, increasing her burden of debt.

(c) What happened to her debt?
Ans: Swapna’s debt increased into a large amount because she was unable to repay her first loan. After her crop failed, she had no sufficient income to clear the debt. In the following year, she had to take another loan to continue cultivation. Although the second crop was normal, her earnings were not enough to cover the old loan. Therefore, the unpaid amount continued to remain a burden. She became trapped in debt and eventually had to sell part of her land to pay off the debt.

(d) What did Swapna finally have to do to repay the debt?
Ans: Swapna finally had to sell part of her land to pay off her debt. Her crop failure had prevented her from earning enough money to repay the original loan. Since the old debt remained unpaid, she had to take another loan for cultivation in the next year. Even though the second crop was normal, her earnings were not enough to clear the old debt. As her financial burden continued to increase, she had no other sufficient means to repay the moneylender. Therefore, she was forced to sell part of her land to settle the debt.

(e) What does Swapna’s situation show about credit?
Ans: Swapna’s situation shows that credit can sometimes make a borrower worse off when the borrower faces serious risks and is unable to earn enough income for repayment. Credit can be useful when it helps a person carry out productive activities and generate income. However, if the activity fails, the borrower may not be able to repay the loan. In Swapna’s case, crop failure caused her income to fall, while her debt continued to increase. She had to take another loan and finally sell part of her land. This situation is called a debt trap.

Case/Source-Based Question 7: Terms of Credit

Read the source carefully and answer the questions that follow:
Every loan agreement specifies an interest rate that the borrower must pay to the lender along with the repayment of the principal. Lenders may also demand collateral against loans. Collateral is an asset that the borrower owns and uses as a guarantee to the lender until the loan is repaid. If the borrower fails to repay the loan, the lender has the right to sell the collateral to obtain payment. Interest rate, collateral, documentation requirement and the mode of repayment together form the terms of credit.

(a) What is the interest rate?
Ans: The interest rate is the amount that a borrower has to pay to the lender in addition to repaying the principal amount of the loan. When a person takes a loan, the lender charges interest for providing the money. The borrower must therefore repay both the original amount borrowed and the interest according to the loan agreement. The interest rate is an important part of the terms of credit because it affects the total amount that the borrower has to repay. A higher interest rate generally means a greater repayment burden for the borrower.

(b) What is collateral?
Ans: Collateral is an asset owned by the borrower that is used as a guarantee for a loan. The borrower promises that the asset will remain as security until the loan is fully repaid. Examples of assets that may be used as collateral include land, buildings, vehicles or other valuable property. If the borrower fails to repay the loan, the lender has the right to sell the collateral to recover the amount due. Therefore, collateral provides security to the lender and is an important part of the terms of credit for many loans.

(c) What happens if the borrower fails to repay the loan?
Ans: If the borrower fails to repay the loan, the lender may use the collateral provided as security to recover the money. Collateral is an asset owned by the borrower and kept as a guarantee until the loan is repaid. When the borrower does not fulfil the repayment agreement, the lender has the right to sell the collateral and obtain payment. Therefore, failure to repay a loan can result in the borrower losing the asset kept as security. This shows why borrowers must carefully consider the terms of credit before taking a loan.

(d) Name the four terms of credit.
Ans: The four main terms of credit are interest rate, collateral, documentation requirement and mode of repayment. The interest rate tells the borrower how much interest must be paid along with the principal amount. Collateral is an asset given as a guarantee against the loan. Documentation requirements refer to the documents that the lender may require before providing the loan. The mode of repayment explains how and when the borrower has to repay the loan. Together, these conditions determine the terms under which a person receives and repays credit.

Case/Source-Based Question 8: Formal and Informal Sources of Credit

Read the source carefully and answer the questions that follow:
Loans can be grouped into formal sector loans and informal sector loans. Banks and cooperatives are formal sources. Moneylenders, traders, employers, relatives and friends are informal sources. The Reserve Bank of India supervises the functioning of formal sources of loans. There is no organisation that supervises the credit activities of lenders in the informal sector. Informal lenders can lend at whatever interest rate they choose and most of them charge a much higher interest on loans.

(a) Name two formal sources of credit.
Ans: The two formal sources of credit are banks and cooperative societies. These sources provide loans through an organised system and their functioning is supervised by the Reserve Bank of India. Formal sources generally follow certain rules and procedures while providing credit. Borrowers may have to complete documentation and meet specific conditions before receiving a loan. Banks and cooperatives are important sources of credit for individuals, farmers, businesses and other borrowers. Formal credit is generally preferred because it is regulated and the interest rates are usually more reasonable than those charged by many informal lenders.

(b) Name any two informal sources of credit.
Ans: Two informal sources of credit are moneylenders and traders. Other informal sources mentioned in the chapter include employers, relatives and friends. Informal lenders are not supervised by an organisation in the same way as formal sources. They may provide loans according to their own conditions and can charge different interest rates. People may approach informal lenders because they can sometimes obtain loans more easily or quickly. However, such loans can become costly when the lender charges a high rate of interest. Therefore, borrowers need to be careful about the conditions of informal credit.

(c) Who supervises formal sources of loans?
Ans: The Reserve Bank of India (RBI) supervises the functioning of formal sources of loans. Formal sources include banks and cooperative societies. Supervision is important because it helps ensure that these institutions follow proper rules while carrying out their credit activities. Unlike informal lenders, formal sources operate within an organised and regulated system. Borrowers can therefore obtain credit under stated conditions. The supervision of the RBI is an important feature of the formal credit system and helps maintain proper functioning of banks and other formal lending institutions.

(d) Why are informal loans generally costly?
Ans: Informal loans are generally costly because informal lenders can charge much higher interest rates. There is no organisation that supervises the credit activities of lenders in the informal sector in the same way that the RBI supervises formal sources. Therefore, informal lenders may decide the interest rate according to their own conditions. A high interest rate increases the total amount that the borrower has to repay. As a result, borrowers may face a heavy repayment burden. This is why people should prefer affordable and properly regulated formal sources of credit whenever possible.

2E. Long Questions and Answers

1. Explain how money solves the problem of double coincidence of wants.
Ans: In a barter system, goods are directly exchanged for other goods without using money. The main difficulty of this system is the double coincidence of wants. It means that both persons must want each other’s goods at the same time. For example, a shoe manufacturer who wants wheat must find a wheat farmer who also wants shoes. This makes exchange difficult. Money solves this problem by acting as a medium of exchange. The shoe manufacturer can sell his shoes for money and then use that money to buy wheat from any farmer. The farmer does not need to buy shoes from him. Thus, money separates the acts of buying and selling and makes exchange easier, quicker and more convenient.

2. Explain the modern forms of money and why currency is accepted as a medium of exchange.
Ans: Modern forms of money mainly include currency and deposits with banks. Currency consists of paper notes and coins that people use for buying goods and services. Modern currency is different from old metallic money because it is not made of precious metals such as gold or silver. It also does not have any important use of its own. However, people accept currency because it is authorised by the government. In India, the Reserve Bank of India issues currency notes on behalf of the central government. No individual or private organisation is allowed to issue currency for general use. Bank deposits are also considered money because people can withdraw them when needed and make payments through cheques. Therefore, currency and bank deposits are important forms of modern money.

3. What are demand deposits? Explain their important features.
Ans: People generally keep only a small amount of cash with them for their daily needs and deposit the extra money in banks. Banks accept these deposits and also pay an amount as interest. Since people can withdraw this money whenever they require it, these deposits are called demand deposits. Demand deposits are an important form of modern money because they can be used for making payments without using cash. Payments can be made through cheques, which instruct the bank to transfer a specific amount from one person’s account to another. Thus, demand deposits provide safety and convenience to depositors. They can be withdrawn on demand and are widely accepted as a means of payment. Therefore, demand deposits, along with currency, constitute money in the modern economy.

4. Explain how banks use the money deposited with them.
Ans: Banks accept deposits from people who have extra or surplus money. They keep only a small proportion of these deposits as cash to meet the daily withdrawal needs of depositors. According to the chapter, banks in India these days hold about 5 per cent of their deposits as cash. Since all depositors do not withdraw their money at the same time, banks can use the major portion of deposits to provide loans. These loans are given to people who need money for different economic activities. Borrowers pay interest on the loans, while banks also pay interest to depositors. In this way, banks act as an important link between people who have surplus funds and those who need funds. Thus, banks help make productive use of people’s savings.

5. Explain with the example of Salim how credit can play a positive role.
Ans: Credit can play a positive role when borrowed money helps a person increase production and income. Salim, a shoe manufacturer, received an order for 3,000 pairs of shoes to be delivered within a month. He needed additional workers and raw materials to complete the order. He obtained leather from a supplier with a promise to pay later. He also received an advance payment from a large trader for 1,000 pairs of shoes. With the help of this credit, Salim arranged the required materials and workers and completed the order on time. After delivering the shoes, he earned a good profit and repaid the borrowed money. Thus, credit helped Salim meet production expenses, complete his order and increase his earnings. Therefore, credit was useful and productive in his situation.

6. Explain with the example of Swapna how credit can lead to a debt trap.
Ans: Credit can create serious problems when a borrower is unable to earn enough money to repay a loan. Swapna, a small farmer, borrowed money from a moneylender to meet the expenses of growing groundnut. During the season, her crop was attacked by pests and failed. She also spent money on expensive pesticides, but they did not help much. As a result, she could not earn enough income to repay the loan. Her debt increased, and she had to take another loan for cultivation the next year. Although the next crop was normal, her earnings were not enough to repay the old debt. Finally, she had to sell part of her land. Thus, repeated borrowing and inability to repay pushed Swapna into a debt trap.

7. Differentiate between formal and informal sources of credit.
Ans:

Basis	Formal Sources of Credit	Informal Sources of Credit
Meaning	Formal sources are organised sources of credit that follow proper rules and procedures.	Informal sources are unorganised sources of credit that do not follow a fixed system of rules.
Examples	Banks and cooperative societies.	Moneylenders, traders, employers, relatives and friends.
Supervision	Their lending activities are supervised by the Reserve Bank of India (RBI).	They are not supervised by any organisation in the same way as formal lenders.
Interest Rate	They generally charge reasonable interest rates.	They often charge much higher interest rates.
Terms and Conditions	Loans are given according to proper rules and procedures.	Lenders may decide their own terms and conditions.
Cost to Borrower	Formal loans are generally safer and more affordable.	Loans can be costly and may increase the repayment burden.
Dependence	Expansion of formal credit can reduce dependence on informal sources.	Heavy dependence on informal credit can create a greater debt burden, especially for poor and rural borrowers.

8. What are Self-Help Groups? Explain how they provide loans to their members.
Ans: Self-Help Groups (SHGs) are small groups that organise rural poor people, particularly women, and encourage them to save regularly. A typical SHG consists of about 15–20 members. Members meet regularly and contribute their savings to create a common fund. Small loans are then provided from this fund to members who need money. The group charges interest, but it is generally lower than the interest charged by moneylenders. The members decide the purpose and amount of loans, interest rate and repayment schedule. After one or two years of regular savings and proper functioning, an SHG can become eligible for a bank loan. The bank loan is given in the name of the group and can be used to create self-employment opportunities for its members.

9. Explain the role of the Reserve Bank of India in formal sector credit.
Ans: The Reserve Bank of India (RBI) plays an important role in the formal credit system. Banks and cooperative societies are formal sources of loans, and their functioning is supervised by the RBI. This supervision helps ensure that formal lending institutions work according to proper rules and procedures. Unlike informal lenders, formal institutions cannot freely operate without regulation. The RBI’s supervision makes the formal credit system more organised and dependable for borrowers. Formal lenders generally provide loans under stated terms and at more reasonable interest rates than many informal lenders. The RBI also has an important role in the monetary system because it issues currency notes on behalf of the central government. Thus, the RBI is important for both the currency system and the proper functioning of formal sources of credit.

10. Why are banks and cooperatives better sources of credit than informal lenders?
Ans: Banks and cooperatives are generally better sources of credit because they belong to the formal sector and their functioning is supervised by the Reserve Bank of India. They provide loans according to proper rules and stated terms. Their interest rates are generally more reasonable than those charged by many informal lenders. Informal sources such as moneylenders and traders are not supervised in the same way and may charge very high rates of interest. Such expensive loans can increase the borrower’s repayment burden and may lead to financial difficulties. Therefore, expanding loans from banks and cooperatives is important, especially in rural areas. Poor people should also have greater access to formal loans so that they can obtain cheaper credit and reduce their dependence on costly informal sources.

Related Links

• CBSE 10 Economics Money and Credit Questions and Answers
• CBSE 10 Economics Sectors of the Indian Economy Questions and Answers
• CBSE 10 Economics Development Questions and Answers
• CBSE 10 Social Science Lifelines of National Economy Questions and Answers
• CBSE 10 Social Science Manufacturing Industries Questions and Answers
• CBSE 10 Social Science Mineral and Energy Resources Questions and Answers
• CBSE 10 Social Science Agriculture Questions and Answers
• CBSE 10 Social Science Water Resources Questions and Answers
• CBSE 10 Social Science Forest and Wildlife Resources Questions and Answers
• CBSE 10 Social Science Resources and Development Questions and Answers