Money and Credit – Learn
how money supports trade, the role of banks in credit, and formal vs informal
credit sources in India’s economy.

Chapter 3 Money And Credit

Class 10 NCERT Economics – Understanding Economic
Development | Questions Answers

Updated for 2024-2025 Exams

 

1. In situations with high risks, credit might create
further problems for the borrower. Explain.

Credit can be risky
when borrowers face situations where they are unable to repay the loan. For
example, in agriculture, if crops fail due to bad weather or pests, the farmer
may not earn enough to repay the loan. This can lead to a debt trap, where the
borrower must borrow again to repay the previous loan, often leading to greater
financial problems.

2. How does money solve the problem of double coincidence
of wants? Explain with an example of your own.

In a barter
system, goods and services can only be exchanged if both parties want what the
other has to offer, which is the double coincidence of wants. Money eliminates
this issue as it acts as a medium of exchange. For instance, if a farmer wants
shoes and the shoemaker does not need wheat, the farmer can sell the wheat for
money and use the money to buy shoes from the shoemaker.

3. How do banks mediate between those who have surplus
money and those who need money?

Banks act as
intermediaries by accepting deposits from people who have surplus money and
lending it to those who need funds for various purposes, such as business or
personal expenses. Banks pay interest to depositors and charge a higher
interest rate to borrowers, thereby earning income from the difference.

4. Look at a 10 rupee note. What is written on top? Can
you explain this statement?

On top of a 10
rupee note, it says “Reserve Bank of India” and “Guaranteed by
the Central Government.” This means that the note is issued by the Reserve
Bank of India and is a legal tender guaranteed by the central government. It
signifies that the currency can be used for transactions across the country.

5. Why do we need to expand formal sources of credit in
India?

Expanding
formal sources of credit is necessary to provide affordable loans to everyone,
especially the poor and small businesses, and to reduce dependence on informal
sources like moneylenders, who often charge high-interest rates. Access to
formal credit can help improve income, promote economic growth, and prevent
debt traps.

6. What is the basic idea behind the SHGs for the poor?
Explain in your own words.

Self Help
Groups (SHGs) are small groups of people, typically women, who save money
collectively and provide loans to each other at low-interest rates. These
groups also help members access loans from banks, creating opportunities for
self-employment and financial independence. SHGs empower people by making them
financially self-reliant and providing a platform to address social issues.

7. What are the reasons why the banks might not be
willing to lend to certain borrowers?

Banks might be
unwilling to lend to certain borrowers, especially poor individuals or small
farmers, because they may not have collateral to offer or the necessary
documents required for a loan. Banks may also consider such borrowers risky if
they lack a stable income or a good credit history.

8. In what ways does the Reserve Bank of India supervise
the functioning of banks? Why is this necessary?

The Reserve
Bank of India (RBI) supervises banks to ensure they maintain a minimum cash
balance and provide loans to various sectors, including small borrowers,
agriculture, and small-scale industries. This supervision is necessary to
maintain the stability of the banking system, prevent bank failures, and ensure
that credit is available to those in need.

9. Analyse the role of credit for development.

Credit plays a
crucial role in development by providing individuals and businesses with the
funds needed to invest in productive activities. For instance, farmers can take
loans to buy seeds, fertilizers, and equipment, while small businesses can
borrow money to expand. Properly managed credit can lead to increased income,
job creation, and overall economic growth.

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.

Manav will
likely compare the interest rates, terms of repayment, collateral requirements,
and ease of obtaining the loan. Banks typically offer lower interest rates and
better terms but require documentation and collateral, whereas moneylenders may
offer quicker loans but at higher interest rates and with less favorable terms.
Manav should choose the option that is more affordable and manageable in the
long term.

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?
Banks may be unwilling to lend to small farmers because they often lack
collateral, formal documents, or a steady income to repay the loan, making them
high-risk borrowers.

(b) What are
the other sources from which the small farmers can borrow?
Small farmers often borrow from informal sources such as moneylenders, traders,
or relatives. They may also get credit from cooperatives or Self Help Groups
(SHGs).

(c) Explain
with an example how the terms of credit can be unfavourable for the small
farmer.
For example, if a small farmer borrows from a moneylender at a high-interest
rate and the crop fails, the farmer may be unable to repay the loan. This leads
to a cycle of debt where the farmer has to borrow again, often under more
difficult terms.

(d) Suggest
some ways by which small farmers can get cheap credit.
Small farmers can get cheap credit by accessing loans through SHGs,
cooperatives, or government schemes that offer low-interest loans. Expanding
the reach of formal credit through banks and providing easier access to these
loans would also help.

12. Fill in the blanks:

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

13. Choose the most appropriate answer:

(i) In a SHG
most of the decisions regarding savings and loan activities are taken by
(b) Members.

(ii) Formal
sources of credit do not include
(c) Employers.