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ECONOMICS (UNDERSTANDING ECONOMIC DEVELOPMENT) - 10 - Social Science solution

Class 10 - Chapter 3: Money And Credit

NCERTChapter 3Solution

1. In situations with high risks, credit might create further problems for the borrower. Explain.

Answer:

Credit is useful only when the borrower is able to repay the loan from the income earned through the activity for which the loan was taken. In situations involving high risks, credit may create additional problems.

How Credit Can Become a Problem

  1. If crops fail due to drought, floods or pests, farmers may not earn enough income to repay the loan.
  2. If a business suffers losses, the borrower may face difficulty in repayment.
  3. Interest continues to accumulate even when income is not generated.
  4. The borrower may be forced to sell land, livestock or other assets.
  5. The borrower may fall into a debt trap by taking another loan to repay the previous one.

Example

A farmer borrows money to cultivate crops. Due to poor rainfall, the crop fails. Since no income is generated, the farmer cannot repay the loan and may become heavily indebted.

Hence In high-risk situations, credit can increase the financial burden instead of helping the borrower.

2. How does money solve the problem of double coincidence of wants? Explain with an example of your own.

Answer:

Under the barter system, exchange could take place only when two persons wanted each other's goods simultaneously. This condition is known as the double coincidence of wants.

Money eliminates this problem because it acts as a common medium of exchange accepted by everyone.

Example

Suppose a teacher wants to buy vegetables. Under barter, the teacher would have to find a vegetable seller who needs teaching services. This may be difficult.

With money, the teacher can receive salary in money and purchase vegetables directly from the seller. The seller can then use that money to buy other goods and services.

Thus, money makes exchange easy and convenient.

3. How do banks mediate between those who have surplus money and those who need money?

Answer:

Banks act as financial intermediaries between savers and borrowers.

Working of Banks

  1. People with surplus money deposit their savings in banks.
  2. Banks pay interest on these deposits.
  3. Banks keep a small portion of deposits as cash reserves.
  4. The remaining amount is given as loans to individuals, businesses and farmers.
  5. Banks charge interest on loans, which is higher than the interest paid on deposits.
  6. The difference between the two rates is the bank's income.

Thus, banks collect savings from people and provide credit to those who need funds for productive purposes.

4. Look at a 10 rupee note. What is written on top? Can you explain this statement?

Answer:

At the top of a ₹10 note, the following statement is printed:

"I promise to pay the bearer the sum of ten rupees."

This promise is made by the Governor of the Reserve Bank of India.

Explanation

  • Currency notes are issued by the Reserve Bank of India (RBI).
  • The RBI guarantees the value of the note.
  • People accept currency because they trust this guarantee.
  • Therefore, currency notes serve as legal tender and can be used for transactions throughout the country.

5. Why do we need to expand formal sources of credit in India?

Answer:

India needs to expand formal sources of credit because a large number of people still depend on informal lenders such as moneylenders and traders.

Reasons

  1. Formal loans carry lower interest rates.
  2. Borrowers are protected by rules and regulations.
  3. Formal institutions reduce exploitation of poor borrowers.
  4. They encourage productive investments in agriculture, industry and services.
  5. Easy access to institutional credit helps reduce poverty.
  6. It prevents people from falling into debt traps.

Therefore, expanding formal credit is essential for inclusive economic development.

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

Answer:

Self-Help Groups (SHGs) are small groups of poor people, usually women, who come together to save money regularly and provide loans to members from their collective savings.

Basic Idea of SHGs

  1. Encourage regular savings among poor households.
  2. Provide easy access to small loans.
  3. Reduce dependence on moneylenders.
  4. Promote self-reliance and mutual support.
  5. Improve the economic condition of poor families.

Benefits

  • Low-interest loans.
  • Financial independence.
  • Empowerment of women.
  • Better access to bank credit.

7. What are the reasons why the banks might not be willing to lend to certain borrowers?

Answer:

Banks may refuse loans to certain borrowers because they fear that the loan may not be repaid.

Reasons

  1. Lack of collateral.
  2. Uncertain source of income.
  3. Poor credit history.
  4. High-risk economic activities.
  5. Small farmers and labourers may not have assets to offer as security.
  6. Possibility of default on repayment.

Since banks must protect depositors' money, they lend carefully after assessing risk.

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

Answer:

The Reserve Bank of India (RBI) is the central bank of the country and supervises all commercial banks.

Functions of RBI

  1. Issues currency notes.
  2. Monitors the functioning of banks.
  3. Ensures banks maintain sufficient cash reserves.
  4. Checks whether banks follow lending regulations.
  5. Protects the interests of depositors.
  6. Controls the money supply in the economy.

Why is this Necessary?

  • To maintain public confidence in the banking system.
  • To ensure safe use of deposits.
  • To prevent financial instability.
  • To ensure fair distribution of credit.

9. Analyse the role of credit for development.

Answer:

Credit plays an important role in economic development because it enables people to undertake productive activities.

Role of Credit

  1. Helps farmers purchase seeds, fertilisers and equipment.
  2. Supports businesses in expanding production.
  3. Creates employment opportunities.
  4. Encourages investment and innovation.
  5. Increases income and productivity.
  6. Promotes economic growth.

However, credit must be available on fair terms and used productively for positive outcomes.

10. 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 should compare the terms and conditions offered by both sources before taking a loan.

Factors to Consider

  1. Rate of interest.
  2. Repayment period.
  3. Collateral requirements.
  4. Transparency of loan conditions.
  5. Additional charges.
  6. Ease of repayment.

Generally, banks provide loans at lower interest rates and under regulated conditions. Therefore, borrowing from a bank is usually more beneficial than borrowing from a moneylender.

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?

Banks may hesitate because:

  • Small farmers often lack collateral.
  • Agriculture is highly dependent on weather conditions.
  • Income from farming is uncertain.
  • There is a risk of loan default.

(b) What are the other sources from which the small farmers can borrow?

  • Moneylenders
  • Traders
  • Relatives and friends
  • Landlords
  • Self-Help Groups (SHGs)
  • Cooperative societies

(c) Explain with an example how the terms of credit can be unfavourable for the small farmer.

A small farmer may borrow from a moneylender at a very high interest rate. If the crop fails, the farmer cannot repay the loan and may have to sell assets or borrow again, resulting in a debt trap.

(d) Suggest some ways by which small farmers can get cheap credit.

  • Expansion of rural banking facilities.
  • Strengthening cooperative societies.
  • Promotion of SHGs.
  • Government-supported agricultural loans.
  • Lower interest rates for small farmers.
  • Simplification of loan procedures.

12. Fill in the blanks.

(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.

13. Choose the most appropriate answer.

(i) In a SHG most of the decisions regarding savings and loan activities are taken by

Answer: (b) Members

Explanation: SHGs are managed democratically by their members who collectively make decisions regarding savings and lending.

(ii) Formal sources of credit does not include

Answer: (c) Employers

Explanation: Employers are part of the informal credit sector, whereas banks and cooperatives belong to the formal sector.