NCERT Class 10 Economics Chapter 3 - Money and Credit

Chapter 3 Money and Credit

Question 1: What is meant by Barter System?
Answer: The system of exchanging goods in order to satisfy each other’s wants is called as Barter system.

Question 2: What is double coincidence of wants?
Answer: The double coincidence of wants means both the parties i.e. the buyer and the seller have to agree to sell and buy each other’s commodities.

Question 3: Mention the modern forms of money.
Answer:
• Modern forms of money include currency paper notes and coins.
• Unlike the things that were used as money earlier, the modern forms of money are not made of precious metals such as gold, silver and copper.
• And unlike grain and cattle, they are neither of everyday use.
• The modern currency is without any use of its own.

Question 4: Where do we use money?
Answer:
• In many of the transactions goods are being bought and sold with the use of money.
• In some of these transactions, services are being exchanged with money.
• For some there might not be an actual transfer of money taking place right now but a promise to pay money later.

Question 5: What are the problems associated with the Barter system?
Answer:
• The system of exchanging goods in order to satisfy each other’s wants is called as Barter system.
• Take the case of a shoe manufacturer. He wants to sell shoes in the market and buy wheat. He has to look for a wheat growing farmer who not only wants to sell wheat but also wants to buy the shoes in exchange. Then only the exchange takes place.
• Double coincidence of wants is an essential feature in Barter system.

Question 6: What are the traditional forms of money?
Answer: Before the introduction of coins, a variety of objects were used as money. For example, since the very early ages Indians used grains and cattle as money.

Question 7: Why is money called a medium of exchange?
Answer:
• Money acts as an intermediate in the process of exchange, that is why it is called a medium of exchange. It is authorised by the government of our country.
• In India, the Reserve Bank of India issues currency notes on behalf of the central government. As per the law no other individual or organization is allowed to issue currency.
• Moreover, the law legalizes the use of rupee as a medium of payment that cannot be refused in settling transactions in India. No individual in India can legally refuse a payment made in rupees.

Question 8: What do people do with extra cash?
Answer:
• The people with extra/surplus cash deposit it in the bank by opening a bank account in their name.
• Banks accept deposits and also pay an interest in deposits.
• In this way people’s money is safe in the banks and it earns an interest.

Question 9: What do you mean by demand deposits?
Answer:
• The people with extra/surplus cash deposit it in the bank by opening a bank account in their name.
• People who deposit their money in the banks have a provision of withdrawing the money whenever they require.
• Since the deposits in the bank accounts can be withdrawn on demands, they are called demand deposits.
• The facility of cheques against demand deposits makes it possible to directly settle payments without the use of cash.

Question 10: 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 11: What is a credit/loan?
Answer: Credit (loan) refers to an agreement in which the lender supplies the borrower with money, goods and services in return for the promise of future payment.

Question 12: What is a collateral?
Answer: Collateral is an asset that the borrower owns and uses this as a guarantee to a lender until the loan is repaid.

Question 13: What are the terms of credit?
Answer: Interest rate, collateral, documentation required and the mode of repayment together comprise the terms of credit.

Question 14: Credit can be a boon or bane. Explain with examples.
Answer:
→ Credit as a boon: We take the example of Salim.
• Salim obtains credit to meet the working capital needed for production. The credit helps him to meet the ongoing expenses of production, complete production and deliver the goods on time, make a good profit and repay the money that he had borrowed. Credit therefore plays a vital and a positive role in this situation.

→ Credit as bane: We take the example of Swapna.
• Swapna, a small farmer takes a loan from the moneylender to meet the expenses of cultivation. Due to the failure of crops, she was unable to repay the loan. She had to sell a part of the land to repay the loan. Credit instead of helping Swapna increase her earnings pushed her into a debt trap. Credit in this case pushes the borrower into a situation in which recovery is painful.

Therefore, credit can be a boon or bane for people.

Question 15: In what ways does the Reserve Bank of India supervise the working of banks?
Answer:
• The Reserve Bank of India supervises the functioning of formal sources of loan.
• Banks keep a small portion of their deposits as cash balance and the rest is given as loans to people.
• The RBI monitors that the banks actually maintain the cash balance.
• Similarly, the RBI sees that the banks give loans not just to profit making businesses and traders but also to small cultivators and small-scale industrialists.
• Periodically, banks have to submit information to the RBI on how much they are lending to, to whom and at what interest rate, etc.

Question 16: Define formal and informal sources of credit.
Answer:
• The formal sources of credit are controlled by the government. Banks and cooperatives are two important formal sources of credit.
• The informal sources of credit include money lenders, traders, relatives and friends.

Question 17: What are SHG’s?
Answer:
• SHG stands for self-help groups.
• A typical SHG can have 15-20 members usually belonging to the same village.
• The main motive of the SHG’s is to pool the savings of the poor people.
• Saving per member can vary from Rs.25-100 or more depending on the ability of the people and the strength of the group.
• The SHG’s provide loans to their members at a reasonable rate.
• After a year or two, if the group is regular in savings, the group becomes eligible for bank loans.
• Loan is sanctioned in the name of the group with the motive to create self-employment opportunities for the members.
• In the recent years, many commercial and cooperatives have provided loans to SHG’s.
• The most important feature of these groups is that they are organized by women. They help women to become financially self-reliant. The regular meetings provide women a platform to talk about and act on various social issues.

Question 18: How do the banks mediate between those who have surplus money and those who are in need of money?
Answer:
• People with surplus money deposit money in their bank accounts.
• Banks keep only 15% of these deposits as cash.
• Banks use the remaining 85% to extend loans for various economic activities.
• Banks charge 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 the depositors is their main source of income.
• Thus, banks mediate between those who have surplus money and those who are in need of money.

Question 19: Why are the poor households still dependent on informal sources of credit?
Answer:
• Banks are not present everywhere in rural India.
• Bank loans require proper documents and collateral.
• Absence of collateral is one of the major reasons which prevents the poor from getting bank loans.
• The poor people can approach the moneylenders for a fresh loan even without repaying their earlier loans.
• The poor people can get loans from the moneylenders for economic and non-economic activities (which is not possible with banks).

Question 20: What are the differences between formal and informal sources of credit?
Answer:

Formal Source of Credit	Informal Source of Credit
Banks and co-operatives come under the formal sources.	Informal sources of credit include moneylenders, traders, employers, relatives, friends etc.
The formal sources of credit are supervised by the Reserve Bank of India.	There is no organization which supervises the credit activities of lenders in the informal sector.
Bank requires collateral and proper documentation for getting a loan.	No collateral is required. They are ready to give loan without documentation.
The rate of interest is low.	The rate of interest is high.
Loans are given for productive purposes/economic activities.	Loans are given for productive/economic or non-productive/non-economic activities too.
Fresh loans are given only after the repayment of earlier loans.	Fresh loans are given even though the earlier loans have not been repaid.

Question 21: Cheap and affordable credit is crucial for the country’s development. Explain. / Why should the banks and cooperative societies lend more?
Answer:
• The informal lenders charge a much higher interest on loans.
• Due to this a larger part of the earnings of the borrowers is used to repay the loan.
• Hence, borrowers have less income left for themselves. In certain cases, the high interest rate for borrowing can mean that the amount to be repaid is greater than the income of the borrower. This could lead to increasing debt and debt trap. Also, people who might wish to start an enterprise by borrowing may not do so because of the high cost of borrowing.
• If the banks and cooperatives lend more it would lead to higher incomes and many people could then borrow cheaply for a variety of needs.
• They could grow crops, do business, set up small-scale industries etc.
• They could set up new industries or trade in goods.
• Hence, cheap and affordable credit is crucial for the country’s development.

Question 22: What are cooperatives? How are they beneficial?
Answer:
• Cooperatives are autonomous associations of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly-owned enterprise.
• There are several types of cooperatives such as farmers' cooperatives, weavers' cooperatives, industrial workers cooperatives etc.
• The cooperatives accept deposits from their members. With these deposits as collateral, the cooperatives can obtain a large loan from the bank. These funds are used to provide loan to members. Once these loans are repaid, another round of lending can take place.

Question 23: Why do you think formal sources of credit are reluctant to give loans to rural people in India?
Answer:
• A number of borrowers have no collateral to pledge against loans, particularly small farmers requiring loans.
• A collateral is an asset that the borrower owns and pledges as a guarantee to the lender until the loan is repaid.
• Repayment of such loan is crucially dependent on the income from selling the crop. Since there is a risk involved (in case of inadequate yield for any reason), banks are not willing to lend to such borrowers who cannot pledge collateral, which can be sold to recover the loan amount in case of default in paying the loan amount.

Question 24: How does money solve the problem of double coincidence of wants?
Answer:
• Double coincidence of wants is an essential feature in a barter system, where goods are directly exchanged without the use of money.
• However, in an economy using money as a medium of exchange, eliminates his by providing the crucial intermediate step.
• For example, it is not necessary for a shoemaker to look for a farmer who will buy shoes made by him and at the same time sell rice to him. All he has to do is to find a buyer for his shoes, who will pay him money for the purchase. With this money, he can purchase rice or any other commodity available in the market.