Money and credit: 10th CBSE Economics

Question: How do banks mediate between those who have surplus money and those who need money?

Answer: We know that banks accept the deposits from the people who have surplus money and also pay an interest on the deposits.

But banks keep only a small portion (15 per cent in India) of their deposits as cash with themselves. This is kept as provision to pay the depositors who might come to withdraw money from their accounts in the bank on any day. They use the major portion of the deposits to extend loans to those who need money. In this way banks mediate between those who have surplus money and those who need money.

Question: Look at a 10 rupee note. What is written on top? Can you explain this statement?
“Reserve Bank of India” and “Guaranteed by the Government” are written on top.

Answer: In India, Reserve Bank of India issues currency notes on behalf of the central government. The statement means that the currency is authorized or guaranteed by the Central Government. That is, Indian law legalizes the use of rupee as a medium of payment that can not be refused in setting transaction in India.

Question: Why do we need to expand formal sources of credit in India?

Answer: We need to expand formal sources of credit in India for many reasons:

1. Compared to formal lenders, most of the informal lenders charge much higher interest rates on loans like 3% to 5% per month i.e. 36% a year.
2. Besides the high interest rate, informal lenders impose various other tough conditions. For example, they make the farmers promise to sell the crop to him at a low price. There is no such condition in formal sector.
3. Informal lenders do not treat well with the borrowers. On the other hand, there is no such situation no such situation in the formal sector.
4. The Reserve Bank of India supervises the functioning of formal sources of loans. In contrast, there no organisation which supervises the credit activities of lenders in the informal sector.
5. Loans taken by poor people from informal lenders sometimes, lead them to debt-trap because of high interest rate.
6. The formal sources of credit in India still meets only about half of the total credit needs of the rural people.
   So, it is necessary that the formal sources of credit expand their lending especially in rural areas, so that the dependence on informal sources of credit reduces as this will also help in the development of the country.

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

Answer: The basic behind the SHGs is to provide a financial resource for the poor through organizing the rural poor especially women, into small Self Help Groups. They also provide timely loans at a responsible interest rate without collateral.

Thus, the main objectives of the SHGs are:

1. To organise rural poor especially women into small Self Help Groups.
2. To collect savings of their members.
3. To provide loans without collateral.
4. To provide timely loans for a variety of purposes.
5. To provide loans at responsible rate of interest and easy terms.
6. Provide platform to discuss and act on a variety of social issues such education, health, nutrition, domestic violence etc.

Question: What are the reasons why the banks might not be willing to lend to certain borrowers?

Answer: The banks might not be willing to lend certain borrowers due to the following reasons:

1. Banks require proper documents and collateral as security against loans. Some persons fail to meet these requirements.
2. The borrowers who have not repaid previous loans, the banks might not be willing to lend them further.
3. The banks might not be willing to lend those entrepreneurs who are going to invest in the business with high risks.
4. One of the principle objectives of a bank is to earn more profits after meeting a number of expenses. For this purpose it has to adopt judicious loan and investment policies which ensure fair and stable return on the funds.

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

Answer: The Reserve Bank of India monitors the amount of money that banks loan out, and also the amount of cash balance maintained by them. It also ensures that banks give out loans not just to profiteering businesses but also to small cultivators, small scale industries and small borrowers. Periodically, banks are supposed to submit information to the RBI on the amounts lent, to whom and at what rates of interest.

This monitoring is necessary to ensure that equality is preserved in the financial sector, and that small industries are also given an outlet to grow. This is also done to make sure that banks do not loan out more money than they are supposed to, as this can lead to situations like the Great Depression of the 1930s in the USA, which greatly affected the world economy as well.