Money and credit: 10th CBSE Economics

Question: Analyse the role of credit for development.

Answer: Credit plays a crucial role in a country’s development. By sanctioning loans to developing industries and trade, banks provide them with the necessary aid for improvement. This leads to increased production, employment and profits. However, caution must be exercised in the case of high risks so that losses do not occur. This advantage of loans also needs to be manipulated and kept under an administrative hold because loans from the informal sector include high interest rates that may be more harmful than good. For this reason, it is important that the formal sector gives out more loans so that borrowers are not duped by moneylenders, and can ultimately contribute to national development.

Question: 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.

Answer: Manav will decide whether to borrow from the bank or the money lender on the basis of the following terms of credit:

1. rate of interest
2. requirements availability of collateral and documentation required by banker.
3. mode of repayment.

Depending on these factors and of course, easier terms of repayment, Manav has to decide whether he has to borrow from the bank or the moneylender.

Question: In India about 80 per cent of farmers are small farmers, who need for cultivation.
(1) Why might banks be unwilling to lend to small farmers?
(2) What are the other sources from which the small farmers can borrow?
(3) Explain with an example how the terms of credit can be unfavourable for the small farmer.
(4) Suggest some ways by which small farmers can get cheap credit.

Answer:

1. Banks might not be willing to lend to small farmers because they don’t have collateral security to deposit in the bank. Some of these farmers are not in the
   position of paying loan, due to already existing loan.
2. The other sources of borrowing are from moneylenders, employer, self-help group, landlord, etc.
3. For example, if a person takes loan from his / her landlord on the basis of security of his/her land. At the end, he / she is not able to pay the loan then landlord can sell ,land and get his money back.
4. Small farmers can get cheap credit by the help of self-help group (SHGs) from bank and they can repay the loan easily after 3 or 4 years. The rate of interest is also low as compared to other sources of credit.

Question: Fill in the blanks:
(1) Majority of the credit needs of the __________households are met from informal sources.
(2) __________costs of borrowing increase the debt-burden.
(3) __________issues currency notes on behalf of the Central Government.
(4) Banks charge a higher interest rate on loans than what they offer on __________.
(5) __________is an asset that the borrower owns and uses as a guarantee until the loan is repaid to the lender.

Answer:

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

Question: Choose the most appropriate answer.
(1) In a SHG most of the decisions regarding savings and loan activities are taken by
(a) Bank.
(b) Members.
(c) Non-government organisation.
(2) Formal sources of credit does not include
(a) Banks.
(b) Cooperatives.
(c) Employers.

Answer:

1. (b)
2. (c)

Question: Analyse the role of money as a medium of exchange.

Answer:

1. The medium of exchange is an important function of money. It means that money acts as an intermediary for the goods and services in an exchange of transaction. Use of money as a medium of exchange has removed the major difficult of double coincidence of want in the batter system.
2. The ‘medium of exchange’ function of money implies that money is generally acceptable by the people. They can buy goods and services they need using money. That is, money facilities multilateral trade.
3. Money also offers economic freedom to the people.