Money and Credit chapter’s exercise solutions and answers are given here. Click here for more study materials on Class 10 Economics – like notes and extra important questions.
Money and Credit Chapter Video Tutorials
|Money and Credit Part -1
|Money and Credit Part -2
|Money and Credit Part -3
|Money and Credit Part -4
|Money and Credit Part -5
|Money and Credit Part -6
|Money and Credit Part -7
|Money and Credit Part -8
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Q. 1. In situations with high risks, credit might create further problems for the borrower. Explain.
Ans. Whenever a person takes credit, it involves an interest rate on the loan and if it is not paid back, then the borrower is forced to give up his collateral or asset which he/she used as the guarantee, to the lender. The result is the debt trap.
Whether credit would be useful or not depends on the risks in the situation and whether there is some support in case of loss.
For example, credit taken by farmers for cultivation could create problems at some time. Basically, crop production involves high costs on inputs such as HYV seeds, fertilizers, pesticides, irrigation, etc. Mainly loan is taken by a farmer at the beginning of the season and it is repaid after the harvest. But in some cases, failure of the crop results in impossible loan payment conditions. Then, in order to repay the loan sometimes, they become bound to sell part of their lands, making their situation worse than before.
There are cases in India, where non repayment of loans leads to farmer’s suicides, example, Maharashtra. Thus, it depends on various factors to conclude whether a credit is useful or not.
Q. 2. How does money solve the problem of double coincidence of wants? Explain with an example of your own.
Ans. Double coincidence of wants is an essential feature, where goods are directly exchanged without the use of money is also ‘known Barter system’. By serving as a medium of exchanges, money removes the need for double coincidence of wants and the difficulties associated with the barter system.
For example – A farmer exchanged his crops for money and from that money he purchased any goods or services which he needs. Now, it is not necessary for the farmer to find the person who sold him daily needs commodity against his crop.
Q. 3. How do banks mediate between those who have surplus money and those who need money?
Ans. Banks keep small deposits as cash (15%) for themselves (to pay the deposits on demand). 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.
Q. 4. Look at a 10 rupee note. What is written on top? Can you explain the statement?
Ans. There are two things which are mentioned on top right on a 10 rupee note; ‘Reserve Bank of India’ and ‘Guaranteed by the Government’. Reserve Bank of India issues currency notes on behalf of the central government of India.
The statement means that the currency is authorised or guaranteed by the Central Government. That is, Indian law legalises the use of rupee, as a medium of payment.
Q. 5. Why do we need to expand formal sources of credit in India? [CBSE SQP, 2020]
Ans. We need to expand formal sources of credit in India:
- To reduce dependence on informal sources of credit because the latter charge high interest rates and do not benefit the borrower much.
- The Reserve Bank of India supervises the functioning of formal sources of loans. In contrast, there is no organisation which supervises the functioning of informal source of loans or the credit activities of lenders in the informal sector.
- After taking loans from informal lenders sometimes, leads the borrowers to debt trap because of the high interest rates.
Thus, it is necessary to the formal sources of credit expand their lending especially in rural areas, so that the dependency on the formal sources of credit are increased, which would benefit the development of the country on a wider scale.
Answer by CBSE marking Scheme:
(i) To save people from exploitation of informal sector.
(ii) Formal sectors charge a low interest rate on loans.
(iii) To save from debt trap.
(iv) It provides cheap and affordable credit.
(v) RBI also supervises the formal sector credit through various rules and regulations which ensures that banks give loans to small cultivators, small borrowers etc. and not just to profit making business and traders.
Q. 6. What is the basic idea behind the SHGs for the poor? Explain in your own words.
Ans. SHGs are established not only to meet the financial requirement of the members of the group but also provide a platform to discuss and act on a variety of social issues such as health, nutrition, domestic violence etc.
There are some main objectives of SHGs, which are as followed –
- It organises the rural poor, especially women, into small Self-Help Groups. O It collects saving of the members.
- It provides loans without collateral.
- It provides timely loans for various purposes.
- It provides loans at reasonable rate of interest and on easy terms.
- It also provides a platform to discuss and act on a variety of social issues such as education, health, nutrition, domestic violence, etc.
Q. 7. What are the reasons why the banks might not be willing to lend to certain borrowers?
Ans. The Banks might not be willing to lend certain borrowers due to the following reasons:
- Banks require proper and legal documents and collateral as security against loans.
- The borrowers who have not repaid previous loans, the banks might not be willing to lend them further.
- Those entrepreneurs, who are going to invest in a business with high risks, the banks might not be willing to lend money.
- One of the main 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.
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Q. 8. In what ways does the Reserve Bank of India supervise the functions of Banks? Why is this necessary?
Ans. The Reserve Bank of India supervises the functions of banks in various ways:
- RBI holds a part of the cash reserve of the commercial banks. RBI mainly ensures that the banks maintain a minimum cash balance out of the deposits they receive.
- The commercial banks have to submit information to RBI on how much they are lending, to whom, and at what interest rate, etc.
- RBI monitors the functioning of banks so that banks give loans not just to profit making businesses and traders but also to small cultivators, small scale industries, small borrowers etc.
Q. 9. Analyse the role of credit for development.
Ans. Credit plays a crucial role in a country’s development. Banks provide a necessary aid for improvement by sanctioning loans to the developing industries and trade. It results in increased production, profits and employment. Nevertheless, 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.
Ans. It would be Manav’s decision to borrow money from the bank or the money lender on the basis of the following terms of credit:
(i) Interest rate: Which source carries low interest rate.
(ii) Documentation and collateral: Which source have lower documentation requirement.
(iii) Mode of repayment: Easier mode of repayment.
Thus, Manav will prefer to borrow from that organisation which has easier terms and conditions of lending.
Q. 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?
(b) What are the other sources from which the small farmers can borrow?
(c) Explain with an example how the terms of credit can be unfavourable for the small farmer.
(d) Suggest some ways by which small farmers can get cheap credit.
(a) Banks require proper documentations and collateral as security against providing loans. But there are situation where small farmers lack in providing such documentations and collateral and even fail to repay the loan in time due to crop failure. Therefore, the banks would not prefer to lend money to small farmers.
(b) Apart from bank, the small farmers can borrow from local money lenders, agricultural traders, big landlords, cooperatives, SHGs, etc.
(c) Example – Rajbir is a small farmer, who borrowed money from a local moneylender at a high interest rate of 3 per cent to grow rice. But the crop was hit by drought resulting in failure. As a result, Rajbir had to sell a part of his land to repay the loan.
(d) The small farmers can get cheap credit from the different sources like – Banks, Agricultural Cooperatives, and SHGs.
Q. 12. Fill in the blanks:
(i) Majority of the credit needs of the ________ households are met from informal sources.
(ii) ________ cost of borrowing increases the tax burden.
(iii) ________ issues currency notes on behalf of the Central Government.
(iv) Bank charges a higher interest rate on loans that what they offer on ________ .
(v) ________is an asset that the borrower owns and uses as a guarantee until the loan is repaid to the lender
(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) 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.
Q. 13. Choose the most appropriate answer.
(i) In a SHG, most of the decisions regarding savings and loan activities are taken by
(c) Non-government organisation
Ans. (b) Members
(ii) Formal sources of credit does not include
Ans. (c) Employers