Haryana State Board HBSE 10th Class Social Science Important Questions Economic Chapter 3 Money and Credit Important Questions and Answers.
Haryana Board 10th Class Social Science Important Questions Economic Chapter 3 Money and Credit
Multiple Choice Questions
Important Questions Of Money And Credit HBSE 10th Class Question 1.
Which among the following is an essential feature of barter system?
(a) It acts as a measure and store of value
(b) It is based on double coincidence of wants
(c) A person holding money can easily exchange any commodity
(d) All of these.
Answer:
(b) It is based on double coincidence of wants
Money And Credit Important Questions HBSE 10th Class Question 2.
Before the introduction of coins, which two of the following objects were used in India as money :
(a) Grain and Cattle
(b) Copper and Gold
(c) Gold and Grain
(d) None of these.
Answer:
(a) Grain and Cattle
Chapter 3 Money and Credit HBSE 10th Class Question 3.
What is the most important function of the banks ?
(a) Accept deposits and extend loans
(b) Give loans to government
(c) Open as many bank accounts as possible
(d) None of these.
Answer:
(a) Accept deposits and extend loans
Question 4.
Currency is a ………… form of money.
(a) Modern
(b) Oldest
(c) Both (a) and (b)
(d) None.
Answer:
(a) Modern
Question 5.
Which among the following issues currency notes on behalf of the central Government?
(a) State Bank of India
(b) Reserve Bank of India
(c) Commercial Bank of India
(d) Union Bank of India.
Answer:
(b) Reserve Bank of India
Question 6.
In India, which type of currency is widely accepted as a medium of exchange?
(a) Dollars ($)
(b) Pounds (£)
(c) Rupee (?)
(d) Euro (€)
Answer:
(c) Rupee (?)
Question 7.
Which one of the following is not a feature of money ?
(a) A store of value
(b) A unit of account
(c) Medium of exchange
(d) Lack of divisibility.
Answer:
(d) Lack of divisibility.
Question 8.
Which one of the following is a major reason that prevents the poor from getting loans from the banks ?
(a) Not affordable due to high rate of interest
(b) Absence of mediators
(c) Absence of collateral security
(d) Lack of capital.
Answer:
(c) Absence of collateral security
Question 9.
What is SHG ?
(a) Self Help Groups
(b) Self Handicraft Groups
(c) Social Help Groups
(d) Society Help Groups.
Answer:
(a) Self Help Groups
Question 10.
Professor Muhammd Yunus is the founder of which one of the following banks?
(a) Commercial Bank of Pakistan
(b) Co-operative Bank of India
(c) Grameen Bank of Bangladesh
(d) All of these.
Answer:
(c) Grameen Bank of Bangladesh
Fill in In the blanks
1. ………….. is used for several transactions.
2. Before the use of money, people followed ………….. of exchange.
3. Money is a accepted as a common …………..
4. In India ………….. can only issue currency notes on behalf of the government of India.
5. Deposit with banks are called ………….
6. The ………….. comprises bank and cooperative societies.
7. The ………….. are organisations of the rural poor people specially women.
8. …………… were used in ancient times as money.
Answer:
l. Money
2.barter system
3. medium of exchange
4. Reserve Bank of India
5. Demand Deposits
6. formal sector
7. Self Help groups
8. Gold seals.
Very Short Answer Type Questions
Question 1.
Define money.
Answer:
Money means that legal thing, which is used as a medium of exchange.
Question 2.
What do you mean by credit or loan?
Answer:
Credit refers to an agreement, in which, the lender supplies the borrower with money, goods or services, in return for the promise of future payment.
Question 3.
What is barter system?
OR
What is the meaning of Barter system.
Answer:
Barter system is a system, by which, one commodity is exchanged with the other, without the use of money.
Question 4.
What is the essential feature of barter system?
Answer:
Double co-incidence of wants is the essential feature of barter system.
Question 5.
What do you mean by double co-incidence of wants?
Answer:
It means, both parties, the buyer and the seller, have to agree to sell and buy, each other’s commodities.
Question 6.
Why money is called a medium of exchange?
Answer:
Money acts as an intermediate in the exchange process, so it is called a medium of exchange.
Question 7.
Why modern currency is accepted as a medium of exchange?
Answer:
Modem currency is accepted as a medium of exchange because it is authorised by the government of the country.
Question 8.
Name the Central Bank of India.
Answer:
Reserve Bank of India.
Question 9.
Who issues currency notes in India?
Answer:
The Reserve Bank of India issues currency notes in India.
Question 10.
What are the two major sources of formal loans for rural households?
Answer:
Sources of formal loans are cooperative society, cooperative banks.
Question 11.
What is a cheque?
Answer:
A cheque is a paper instructing the bank to pay a specific amount from the person’s account to the person in whose name the cheque has been issued.
Question 12.
Who issues the currency notes on behalf of the Central Government of India?
Answer:
The Reserve Bank of India issues currency notes on behalf of the central government.
Question 13.
Why do banks keep a small proportion of the deposits as cash with themselves?
Answer:
Banks in India hold about 15 per cent of their deposits as cash to pay the depositors who might come to withdraw money from the bank on any given day.
Question 14.
Which is the main sector of credit for rich urban households in India.
Answer:
Formal sector is the main sector of credit for rich urban households in India.
Question 15.
What is Indian law regarding issue of currency?
Answer:
As per Indian law, no other individual or organisation is allowed to issue currency.
Question 16.
What is demand deposit ?
Answer:
The deposit in the tank accounts, that can be withdrawn on demand by customers, is known as demand deposit.
Question 17.
Which other facility is offered by demand deposit?
Answer:
Demand deposit offers payment made by cheques.
Question 18.
Write two functions of banks.
Answer:
(i) To deposit money,
(ii) To give loAnswer:
Question 19.
What is the main source of income of banks?
Answer:
The difference between, what is charged from borrowers and what is paid to depositors, is the main source of income of banks.
Question 20.
What do you mean by cheque?
OR
What is a bank cheque?
Answer:
A cheque is a paper, ordering the bank to pay a specific amount, from the person’s account to a person, in whose name the cheque has been issued.
Question 21.
How does money act as a medium of exchange?
Answer:
A person holding money can easily exchange it for any commodity or service that he or she might want. Money acts as an intermediate in the exchange process.
Question 22.
What are the two forms of modem currency?
Answer:
Paper notes and coins are the two forms of modern currency.
Question 23.
Why do lenders ask for collateral while lending?
Answer:
If the borrower fails to repay the loan, the lender has the right to sell the collateral to obtain payment. Therefore, lenders ask for collateral.
Question 24.
Which is the major reason that prevents the poor from getting bank loans?
Answer:
In the absence cif collateral, poor people are unable to get bank loAnswer:
Question 25.
What do you mean by double coincidence of wants?
Answer:
If both parties agree to buy and sell each other’s commodities respectively then it is known as double concidence of wants.
Question 26.
What are the modern forms of money?
Answer:
Paper notes and coins are the modern forms of money.
Question 27.
What is the reason for accepting paper notes as a medium of exchange in India.
Answer:
The reason for accepting paper notes as medium of exchange in India is that paper notes are authorised by the Government of India.
Question 28.
What do you mean by the term collateral?
Answer:
It is an asset that the borrower owns and uses this as a guarantee to a lender until the loan is repaid.
Question 29.
What do you mean by an account payee cheque?
Answer:
An account payee cheque indicates that the payment will be made directly in the account of the person or company whose name is mentioned
on the cheque.
Question 30.
What do you mean by debt-trap?
Answer:
Dept-trap is a situation in which a person takes a loan but is unable to repay his loan. To repay his loan either he has to take a fresh loan or sell some portion of his land.
Question 31.
Name the sources of credit available in India.
Answer:
Following are the sources of credit available in India:
(i) Formal sources of credit,
(ii) Informal sources of credit.
Question 32.
Name the formal sources of credit.
Answer:
The formal sources of credit are:
(i) Banks,
(ii) Co-operative societies.
Question 33.
Name the informal sources of credit.
OR
Give two examples of informal sources of credit.
Answer:
The informal sources of credit are:
- Moneylenders
- Traders
- Landowners,
- Relatives
- Friends etc.
Question 34.
Write the full form of SHG.
Answer:
SHG-Self Help Group.
Question 35.
How does SHGs help, the borrowers?
Answer:
The SHGs help borrowers to overcome the problem of lack of collateral.
Question 36.
In which year was the Grameen Bank of Bangladesh established?
Answer:
Grameen Bank of Bangladesh was established in 1970.
Question 37.
Name the founder of Grameen Bank of Bangladesh.
Answer:
Professor Muhammad Yunus was the founder of Grameen Bank of Bangladesh.
Question 38.
What do you mean by terms of credit?
Answer:
Interest rate, collateral and documentation requirement, and the mode of repayment, together, comprise of, what is known as the terms of credit.
Short Answer Type Questions-I
Question 1.
Why transactions are made in money?
Answer:
A person, holding money, can easily exchange it for any commodity or service, that he or she might want. Thus, everyone prefers to receive payments in money and then exchange the money for things that they want. Take the case of a farmer who wants to sell wheat and buy domestic commodities. The farmer will first exchange wheat, that he has grown, for money, and then, exchange the money for domestic commodities.
Question 2.
Why currency is accepted as a medium of exchange?
Answer:
Currency is accepted as a medium of exchange because it is authorised by the government of the country. It cannot be refused in settling transactions. For example, no individual in India can legally refuse a payment made in rupees. Hence, in India, the rupee is widely accepted as a medium of exchange.
Question 3.
What is demand deposit? Why is it considered as money?
Answer:
The deposits in the bank accounts which can be withdrawn on demand, by customers, are called demand deposits. Demand deposit is considered as money due to following reasons:
- It can be used as a medium of exchange.
- It is acceptable to all.
- It helps in making payment without cash, by using cheque.
Question 4.
Write some benefits of deposits with banks.
Answer:
People deposit their extra cash with the banks, by opening a bank account in their name. The benefits of deposit with banks are as follows :
- Banks pay an amount as interest on the deposits.
- Banks accept the deposits. In this way, people’s money is safe with the banks.
- People also have the provision to withdraw the money when they require.
- Payment can be made by cheque in place of cash.
For this, banks issue a cheque book to their account holders.
Question 5.
What is a cheque? Why do banks issue cheque?
Answer:
A cheque is a paper, instructing the bank to pay a specific amount, from the person’s account, to the person in whose name the cheque has been issued. The facility of cheques against demand deposits makes it possible to directly settle payments, without the use of cash. For payment through cheque, the payer, who has an account with the bank, makes a cheque for a specific amount.
Question 6.
Discuss the term ‘moneylenders’.
Answer:
The professional moneylenders and the agriculturist moneylenders are the most important and popular source of rural credit in India. They conduct moneylending as a side business. They are popular in rural areas because of their easier procedure of lending and their willingness to lend for unproductive purposes. These moneylenders charge a very high interest rate. They cheat the innocent and illiterate farmers.
Question 7.
Discuss Self-Help Groups.
Answer:
Self-help groups have emerged recently, to help formal credit system. These groups promote savings by asking for a minimum contribution from each member of the group. Credit is sanctioned to the needy members of the group. Credit is sanctioned to be repaid in small instalments. These groups help the rural people in improving their economic condition.
Short Answer Type Questions-II
Question 1.
“Money eliminates the need for double co-incidence of wants.” Explain this statement.
Answer:
Double co-incidence of wants is an essential feature of barter system. In a barter system, goods are exchanged without the use of money. What a person desires to sell, is exactly, what the other person wishes to buy. Imagine how much more difficult it would be, if a shoe manufacturer had to directly exchange shoes for wheat, without the use of money. He would have to look for a wheat growing farmer, who wants to buy the shoes in exchange of wheat. That is, both parties have to agree to sell and buy each others’ commodities.
Money, by providing the crucial intermediate step, eliminates the need for double co-incidence of wants. It is no longer necessary for the shoe-maker to look for a farmer who will buy his shoes, and at the same time, sell him wheat. All he has to do, is to find a buyer for his shoes. Once he has exchanged his shoes for money, he can purchase wheat or any other commodity, from the market.
Question 2.
How is money used as a medium of exchange? Explain with examples.
Answer:
Following example explains the use of money as a medium of exchange
- In day-to-day transactions, goods are being bought and sold with the use of money.
- The transactions are made in money as a person holding money can easily exchange it for any commodity or services.
- Use of money has made it easier to exchange services such as the service of a doctor, teacher etc.
Question 3.
Explain the two functions of money.
Answer:
The two functions of money are as follows:
(i) Medium of Exchange-Money works as a medium of exchange. It is used in the sale and purchase of goods and services. We can get commodities in exchange of money. The payments are made through money.
(ii) Store of Value-Money serves as a store of value, such as, wealth, in liquid form. At present, people want to have some currency notes or coins in their pocket, home, bank accounts etc., to use them anytime for the purchase of anything. It is possible only with the help of money. We can store value in the form of generalised purchasing power and can use the money in any way we like.
Question 4.
“Banks mediate between those who have surplus funds and those who are in need of these funds.” Clarify this statement.
Answer:
The mechanism is as follows:
- Banks accept deposits from people who have surplus money.
- Banks pay an amount as interest on the deposits.
- Banks keep only a small proportion of their deposits as cash with themselves. This is kept as a provision to pay the depositors, who might come to withdraw money from the bank on any given day.
- Since, on any particular day, only some of its depositors may come to withdraw cash, the bank is able to manage with this provisional cash.
- Banks use the major portion of the deposits to extend loAnswer: Banks make use of the deposits to meet the loan requirements of the people.
Question 5.
Credit can plays a negative role. Justify the statement.
OR
“Credit sometimes pushes the borrower into a situation from which recovery is very painful.” Support the statement with examples.
Answer:
Credit play a negative role when it results in formation of a circle or a trap known as debt-trap. Debt-trap is a situation in which a person after taking a loan is not able to pay back the loan and takes a fresh loan.
It is more common in rural areas because:
(i) A borrower tries to repay a loan by selling the agricultural produce, but this may not be enough to repay the entire loan.
(ii) Rural borrower normally depends on informal sources of credit who charge a high rate of interest. This repayment of larger amounts may sometimes be larger than their income. Thus, it can be concluded that credit can play a negative role also leading to debt trap and even more poverty than before.
Question 6.
“Loans from banks always help to raise people’s earning capacity.” Justify this statement using suitable examples.
OR
“Credit can play a positive role.” Justify the statement with examples.
Answer:
Loans from banks always help to raise people’s earning capacity. The examples to justify this are—
- People can purchase machinery and equipment with a loan to start productive activities in manufacturing.
- With a loan, people can purchase raw materials for processing into finished products, this increases their earning capacity.
- With the loans people can get training or learn some kind of skill which helps them in the future to increase their earning.
Question 7.
Why should the bank and co-operative societies provide more loan facilities to the rural households in India? ‘
Answer:
Bank and Co-operative Societies should provide more loan facilities to the rural households in India because of the following reasons:
(i) India is an agricultural country, so the rural households are in need of a special attention. So, the bank and co-operative societies should fulfil the commitment of helping the needy people of the rural areas, as in their welfare makes the nation stronger.
(ii) Most of the urban people rely upon the rural people for their food requirements and so, the welfare of the rural households is extremely important. So, the hank and co¬operative societies should provide more facilities to the rural households, in the matter of advancing loan.
(iii) Most of the people in rural areas are illiterate and so, they can be easily cheated by moneylenders. Only the banks and co-operative societies can help to save them from such exploitation.
(iv) Only the bank and co-operative societies can provide loans to the rural households at low rates, which can easily save them from the clutches of the local moneylenders.
Question 8.
Credit has its own unique role for development : Justify the statement with argument.
Answer:
Credit has its own unique role for development because of the following reasons:
- Cheap and affordable credit can be used to set up small-scale or cottage industries.
- Farmers can buy agricultural inputs with credit and thereby increase their crop production.
- Credit is also needed by the manufacturing sector to buy raw materials, machines, pay wages to labours etc.
Question 9.
Why is modem currency accepted as a medium of exchange without any use of its own? Find out the reason.
Answer:
The modern currency is not made up of precious metal such as gold, silver or copper and like grain and cattle, it is not of everyday use. Thus, the modern currency is without any use of its own. But still it is accepted as a medium of exchange as it is authorised by government of the country. It has certainly made transactions easier and is easy to carry also. In India, the Reserve Bank of India issues currency notes on behalf of the Central Government and guarantees the value attached to paper notes and coins. Thus, modem currency is accepted as a medium of exchange without any use of its own.
Question 10.
“Deposits with the banks are beneficial to the depositors as well as to the nation.” Examine the statement.
Answer:
The deposits with the banks are beneficial to the depositors because of the following reasons :
(i) Safety of the surplus money.
(ii) Earn interest on the surplus money.
(iii) Can make payment easily through cheques.
Benefits of Bank deposits to the nation are:
(i) Availability of cheap loans as large part of these deposits are given as loans
(ii) Boost the industry and agriculture by providing cheap loans
From the above points, it can be concluded that deposits with the banks are beneficial to the depositors as well as to the nation.
Question 11.
What are the reasons for formal credit not being available to the rural poor?
Answer:
The main reasons for formal credit not being available to the rural poor, due to which they are dependent on informal credit sources are:
(i) Lack of documents of employment, earnings, etc. to convince banks that they will be able to repay the loan.
(ii) They usually lack any property which may act as collateral or security against loan default.
(iii) Rural people are also not aware of the credit facilities provided by formal sources also the availability of formal sources is less in rural areas.
Question 12.
Name two formal and two informal sources of credit in India. State any three advantages of formal sources of credit. (CBSL 20 Hi1
Answer:
Two formal sources of credit are bank and cooperatives and two informal sources of credit are moneylenders and traders. The advantages of formal sources of credit are:
- It provides loans at a fixed rate and terms.
- It gives loans not just to profit-making businesses and traders but also to small cultivators, small-scale industries and small borrowers etc.
- Cost of borrowing is less and hence promote borrowing and more economic growth.
- There is no exploitation as in the case with the informal sectors.
Question 13.
Explain any two features each, of formal sector loans and infdrmal sector loAnswer:
Answer:
Two features each, of formal sector loans and informal sector loans are as follows :
Formal Sector Loans:
- Formal sector loans are such loans, which are taken either from the bank or the co-operatives.
- In the case of formal sector loans, the rate of interest is very low as compared to informal sector.
- In the formal sector of loans, there is no exploitation. ”
Informal Sector Loans:
- Informal Sector loans are those, which are taken from moneylenders, traders, relatives and friends.
- In the case of informal sector of loans, the rate of interest is quite high : 36% to 60% per annum.
- In the informal sector, there is exploitation by moneylenders and traders, etc.
Question 14.
Discuss the uses of Self-Help Groups.
Answer:
Following are the uses of Self-Help Groups:
- Self-Help Groups help borrowers to overcome the problem of lack of collateral.
- Self-Help Groups provide timely loans for a variety of purposes and at a reasonable interest rate.
- Self-Help Groups help in organising rural poor people.
- Self-Help Groups help women to become financially self-reliant.
- The meetings of self-help groups provide a platform to discuss and act on various social issues, such as- health, nutrition, domestic violence etc.
Question 15.
How can the formal sector loans be made beneficial for poor farmers and workers? Suggest any five measures.
Answer:
The measures to make formal sector loan beneficial for poor farmers and workers are:
- The formal sector like banks and cooperatives should lend more to poor people and workers, particularly in rural areas.
- The formal sector should provide cheap and affordable credit to the poor people so that repayment is easy.
- Formal sector should work out other ways of arranging collateral from the poor people.
- By providing linkage between self-help groups and banks, formal sector of credit can be increased.
- There should be more number of cooperatives and banks in rural areas and people should be made aware of their presence.
Lon Answer Type Questions
Question 1.
“Barter system has a number of problems”. What are these? Explain.
Answer:
There are many problems in the barter system. Some of them are as follows :
(i) Problem of Double co-incidence-The most serious problem of barter system is double co-incidence. In barter system, a person having a surplus of one commodity should be able to find another person who wants that commodity, as well as, has some commodity required by him to offer in exchange. This is a very difficult task. If wants do not match exactly, no exchange will take place.
(ii) Problem in measurement of Value-The second problem of barter system is measurement of value. Every commodity has its own value. It is difficult to measure the value of commodities in barter system.
(iii) Lack of Divisibility-The other problem of barter system is lack of divisibility. There are many goods, which cannot be cut into pieces to make exchange, such as-goat, cow, bed, chair etc. If they are cut into small pieces, they will lose their identity and utility. So, these commodities cannot be exchanged in pieces for different things.
(iv) Problem of Store of Value-Barter system does not provide any method of storage of purchasing power.
Question 2.
Who issues currency notes in India? Discuss the functions of Commercial Banks.
Answer:
In India, the Reserve Bank of India issues currency notes, on behalf of the central government. The functions of Commercial Banks are as follows :
(i) Accept Deposits-The most significant and traditional function of commercial banks is to accept deposits. Banks accept surplus money of people, under savings account, current account and fixed deposits. They play the role of custodian of money for public.
(ii) Provide Loans-There is a huge demand for loans for various economic activities. Banks fulfil their needs of money by providing them loAnswer: Loans may be granted in the form of cash credit, ordinary loans, overdraft, discounting of bills etc. So, the second important function of commercial bank is to provide loans to people.
(iii) Credit Creation-Money deposited by people in bank, is given to other people, in the form of loans, to satisfy their need of money. People, who take loan from banks, do not spend whole of the money. They deposit balance money in their bank account. The process continues, in this way, money multiplies and banks make a system of credit creation.
(iv) Transfer of Funds-Commercial banks transfer funds of a customer’s account through cheques, drafts, credit card, cash order, etc.
(v) Agency Functions-In modern times, commercial banks also act as an agent of the customer. They accept subscription for shares from various shareholders, on behalf of their respective company.
Question 3.
What do you mean by Bank? Describe the loan activities of Banks.
Or
What do the banks do with the deposits which they accept from the public? Explain.
Answer:
Bank: An institution, which accepts deposits from people and lets them withdraw their deposits on their demands, is known as bank. Loan activities of Banks : Loan activities of banks are the following –
(i) Bank accepts surplus money of people, under savings account, current account and fixed deposits. Bank keeps only a small proportion of their deposits as cash with themselves. For instance, banks in India, these days, hold about 15 per cent of their deposits, as cash. This is kept as provision to pay the depositors, who might come to withdraw money from the Bank on any given day. Since, on any particular day, only some of its money depositors come to withdraw cash, the bank is able to manage with this provisional cash.
(ii) Banks use the major portion of the deposits to extend loAnswer: There is a huge demand for loans for various economic activities. Banks make use of the people’s deposits to meet the loan requirements of the people.
(iii) Banks lend to people, who demand money as loan, and charge interest from them.
(iv) Thus, banks mediate between those, who have surplus funds (the depositors), and those, who are in need of these funds (the borrowers).
(v) Banks charges a higher interest rate on loans than what they offer on deposits. The difference between what is charged from borrowers and what is paid to depositors, is their main source of income. After meeting all the expenses from this income, the remaining money is profit or loss for a bank.
Question 4.
‘Banks play an important role in an economy. How?
Answer:
The banks play an important role in the economy of the country. It can be justified from the following reasons :
- The banks keep the money of the people in safe custody, otherwise people can become an easy prey of robbers or thieves.
- They give interest on the money deposited by the people. Thus, they increase the income of the depositors.
- They mediate between those people, who have surplus money and those, who are in need of this money.
- They provide loans on low interest to a large number of people.
- They promote agriculture, by providing cheap loans to the farmers, who can increase their production.
- Banks boost the industrial sector of a country, by providing cheap loans to the industrialists.
- Banks employ a large number of people, and, as such, they solve the employment problem also.
- Banks are the backbone of the country’s trade. They also provide loans for traders to increase their trade.
Question 5.
How do the bank credits (loan) play a positive role in production? Give a suitable example.
Answer:
A large number of transactions in our day-to-day activities involve credit, in some form or the other. Loan helps the peasants to grow their crops. It helps the industrialists to establish industrial units, to complete production on time and to meet the ongoing expenses of production. This increases their income. Loans play a significant role in the development of country. At present, banks, in comparison with other sources, provide loans on cheap rates for their consumers.
Banks keep only a small proportion of their deposits as cash with themselves, while the large proportion of rest of the money is provided as loans for various economic activities, because there is a great demand for loan. Banks make use of the deposits to meet the loan requirements of the people. People borrow money from banks on low rates of interest and invest it into production and acquire profit. For example-Sohan has a shoe factory. Sohan has received an order from a large trader in town for five thousand pairs of shoes, to be delivered in a month’s time.
To complete the production on time, Sohan has to hire a few more labourers for stitching and pasting work. He has to purchase the raw materials. So, he needs more money to meet his expenses. He takes loan from bank, after the completion of formalities. After a month, he completes his order. This is how, the credit helps him to meet the ongoing expenses of production and to make the delivery on time. Thus, Sohan gets his income increased by procuring a bank loan. In this way, banks pla3′ a positive role in production.
Question 6.
Write two situations of credit and mention essential terms of credit.
Answer:
Credit refers to an agreement, in which, the lender supplies the borrower with money, goods or services, in return for the promise of future payment.
Credit has two situations, which are following:
(i) Filfet Situation: In one situation,, credit helps to increase earnings and therefore, the person is better off than before.
(ii) Second Situation: In another situation, because of the crop failure, credit pushes the person into a debt trap, from which, recovery is very uncertain. Instead of increase in income, situation of the borrower becomes worse. Therefore, it depends on the risks in the situation and whether there is some support in case of loss.
Essential terms of Credit:The main terms of credit are as given below:
(i) First of all, a borrower will have to present a certificate that how much money he should be lended, that can be repayed by him.
(ii) The borrower will have to furnish the details of his income, if he/she is in service.
(iii) Bank requires collateral, which includes land titles, deposits with banks, livestock, etc.
(iv) Bank can require a guaranter, who can repay the borrowed money, in c5fee the borrower is unable to repay.
Question 7.
Describe the four main sources of credit for the rural households.
Answer:
Four main sources of credit for the rural households are as given ahead :
(i) Moneylenders:
The professional moneylenders and the agriculturist moneylenders are the most important and popular source of rural credit in India. They conduct moneylending as a side business. They are popular in rural areas because of their easier procedure of lending and their willingness to lend for unproductive purposes. These moneylenders charge a very high interest rate. They cheat the innocent and illiterate farmers.
(ii) Commercial Bank:
Almost twenty-five percent of the total loan, taken by rural households, is from commercial banks, in India. These banks provide loan at a lower rate of interest, in comparison to that of informal moneylenders. But, poor and small farmers cannot take loan easily, as the banks need collateral, which they do not possess.
(iii) Co-operative Societies:
Co-operative Societies are another significant sources of taking loan by rural households.
The twenty-seven percent of total deposit money is acquired from Co-operative Societies. In comparison to the informal sources, these have lower interest rates.
(iv) Self-Help Groups:
Self-help groups have emerged recently, to help formal credit system. These groups promote savings by asking for a minimum contribution from each member of the group. Credit is sanctioned to the needy members of the group. Credit is sanctioned to be repaid in small instalments. These groups help the rural people in improving their economic condition.
Question 8.
Mention any two drawbacks of informal sector loAnswer: How are the formal sector loans different in this conte?
Answer:
Informal sector lenders those, which are taken from money lenders, traders, employers, relatives and friends.
The main drawbacks of informal sources of loans are as follows:
(i) High Interest Rate-The rate of interest of informal sources of loans is high because of higher risk involvement. That’s why, the loan becomes very expensive and borrower might be unable to pay off the loan.
(ii) Exploitation of Borrowers-Sometimes, borrowers get exploited by moneylenders or landlords. Borrowers are given threats and intimidation, in case, they default in the repayment of loAnswer: They are forced to work without wages for their lenders.
(iii) No Legal Resources-There is no legal resources in informal sources of loans There is no written agreement between the borrower and the lender. This also leads to exploitation, for which, no legal help can be availed.
The formal sector credit is better in the following ways:
- The formal sector credits include the sources of loan, which are registered by the government.
- These sources work under the supervision of the Reserve Bank of India.
- The objective of providing loan by these formal sources, is the welfare of society, alongwith earning profit.
- These sources lend money at a low rate of interest.
- These formal sources do not put any unfair conditions before the borrowers.
- Borrowers are not exploited by the formal sources.
Question 9.
Explain the role of Self-Help Groups in the rural economy.
Answer:
Self-Help Groups consist of certain members who pool their savings and constitute a fund which is further used in making finance and advances available to other members. A typical Self-Help Group has 15 to 20 members. The members pool their savings and after some time, it becomes a large amount which is used to give loans to the needy ones at a very nominal rate of interest. This helps to reduce the functioning of informal sectors of credit.
(i) They help borrowers overcome the problem of lack of collateral.
(ii) They can get timely loans for variety of purposes and at reasonable interest rates. They are building blocks of the economic organisation of the rural poor.
Question 10.
Describe the significance of the Reserve Bank of India.
Answer:
The significance of the Reserve Bank of India is discussed below:
- It issues currency notes on behalf of the central government.
- It supervises the functioning of formal source of loAnswer: RBI monitors the banks and ensures that they maintain minimum reserves as per the guidelines of central bank.
- It also sees that banks give loans not just for profit making to traders but also to small borrowers, small cultivators etc.
- Periodically, banks have to submit information to RBI on how much they are lending, to whom, at what interest rate, etc.
- When a commercial bank fails to get financial accommodation from anywhere, it approaches the central bank as the last resort. Central Bank advances loan to such banks against approved securities. It ensures that the banking system of the country does not suffer from any setback and money market remains stable.
- It acts as a banker to the government and is the cr odian of the foreign exchange reserves of the economy.