D.P.S- MODERN INDIAN SCHOOL, DOHA, QATAR
Chapter– 3 Money and Credit
- Who issues currency notes on behalf of the central government? 1 Mark
The Reserve Bank of India
2. What is a cheque? 1 Mark
It is a paper that instructs the bank to pay a specified amount from a person’s account to the person to whom it is issued.
3. Why the Reserve Bank of India is called a central banking institution? 1 M
Because it controls and supervises the banking operations in the country.
4. What does NABARD mean? 1 Mark
National Bank of Agriculture and Rural Development
5. What are the limitations of the barter system? 3 Marks
- Two people with different type of needs and goods must be there to satisfy each other’s needs.
- There are many products which cannot be divided.
- Valuation of goods is very difficult.
6. ‘In many situations credit might create future problems for the borrower.’ How? 3 Marks
- Taking credit involves an interest rate on the loan and if it is not paid back then the borrower is forced to give back his collateral or asset used as guarantee to the lender.
- Thus in situations with high risks, if the risk affects the borrower badly, then he ends up losing more than he would have without the loan.
- Hence credit may create future problems for the borrower which is known as ‘Debt Trap.’
7. How does money solve the problem of double coincidence of wants? Explain with an example. 3 Marks
- Double coincidence of wants implies a situation where two parties agree to sell and buy each-other’s commodities i.e. what one party desires to sell and what other party wishes to buy.
- Money solves the problem of double coincidence of wants by acting as a medium of exchange that can be used for all commodities.
- For example- if an ice cream vendor wants a bicycle but the bicycle manufacturer wants clothes and not ice creams then the vendor can use the money to obtain the bicycle to avoid the mammoth task of comparing the number of ice creams with the bicycle.
8. What are demand deposits? Why are demand deposits considered as money? 3 Marks
Ans. The deposits in the bank accounts which can be withdrawn on demand are known as demand deposits.
It is considered as money:
- They can be used as a medium of exchange.
- They are easily acceptable.
- They help in settling payment without the use of cash.
9. What are the advantages of depositing money in the banks? 3 Marks
Why do people hold bank deposits?
- It is the safer place to keep money as compared to the house or a working place.
- People can earn interest on the deposited money.
- People have the provisions to withdraw the money as and when they require.
- People can also make payment through cheques.
10. List out the terms of credit. 3 Marks
The following forms the terms of credit-
- Interest rate
- Mode of repayment
- Documentation required.
11. What is collateral? 3 Marks
- Collateral is an asset that the borrower owns (such as land, building, vehicles, livestock, deposits with banks) and uses this as a guarantee to a lender until the loan is repaid.
- If the borrower fails to repay the loan, the lender has the right to sell the asset or the collateral to obtain the payment.
- Property such as land, livestock etc. are some of the common examples of collateral used for borrowing.
12. ‘RBI plays a crucial role in controlling the formal sector loans’. Explain.
- The formal resource work under the supervision of the Reserve Bank of India or the RBI. The RBI monitors that the banks actually maintain the cash balance.
- The RBI sees that the banks give loans not just to profit making business and trade, but also provide loans to small cultivators, small scale industries, small borrowers, etc.
- The rate of interest of the formal lenders is decided by the RBI. So normally, the interest rates are very low.
13. Explain the loan activities of banks. 3 Marks
What is the main source of income for the bank?
- Banks keep only a small proportion of their deposits as cash with themselves. This is kept as a provision to pay the depositors who might come to withdraw money from the bank.
- Banks use the major portion of the deposits to extend loans. Banks make use of the deposits to meet the loan requirements of the people.
- In this way, banks mediate between the depositor and borrowers.
Banks charge a higher interest rate on loans than what they offer on deposits.
- The difference between what is charged from the borrowers and what is paid to the depositors is their main source of income.
14. Jai Raj needs a loan to set up small business. On what basis he will decide whether to borrow from the bank or moneylender? Discuss. 3 Marks
Ravi Kiran will decide whether to borrow from the moneylender or the bank on the basis of the following terms of credit-
- Rate of interest
- Availability of collateral and documentation required by the banker
- Mode of repayment
15. Give reasons why banks might not be willing to lend to certain borrowers?
Banks might not be willing to lend to certain people- 3 Marks
- Who can not provide collateral,
- Who don’t have steady earnings or jobs
- Who have a history of non-repayment of loans.
16. Why do we need to expand formal sources of credit in India? 5 Marks
Why should banks and co-operatives need to lend more?
- We need to expand the formal sources of credit in India because of the following reasons-
- There is no organization which supervises the credit activities of lenders in the informal sector.
- To reduce the dependence of the borrowers from the informal sources of credit as they charge very high interest rates and don’t benefit the borrower much.
- There is no one to stop them from using unfair means to get their money back.
- Higher interest rates in the informal sector could lead to increasing debt and eventually a debt trap situation.
- Also, people who might wish to start a business by borrowing may not do so because of the high cost of borrowing.
17. ‘Most of the poor households are still dependent on informal sources of credit’. Why? 5 Marks
- Banks are not present everywhere in rural India, where as the informal sources are easily available in all the villages.
- Getting a loan from the bank is much more difficult than taking a loan from the informal resources because bank loans require proper documents and collateral. Most of the poor people don’t possess anything to offer as collateral.
- Moneylenders provide loan to the poor people without any collateral.
- The formal sources provide loan only for productive purposes, whereas the informal sources provide credit for productive and non-productive purposes.
- The method of business of the formal source is very complex, whereas the informal resources have a very simple way of business.
18. What does SHGs mean? How does it help the poor? 5 Marks
- SHGs stand for Self-Help Groups.
- A Self-Help group is a small group comprising people in the rural areas who collect their savings and loan these out to the members on an interest rate lower than that charged by the informal sector.
- The basic idea behind SHGs is to provide a platform for self-help in the financial areas.
- They help the borrowers to overcome with the problem of lack of collateral.
- If the SHG functions well for over a year then it becomes eligible for loans from banks and such loans are then used for creating self-employment opportunities for the poor
19. In what ways does the Reserve Bank of India supervise the functions of the banks? Why is it necessary? 5 Marks
- The Reserve Bank of India supervises the banks in a number of ways-
- The RBI ensures that the banks maintain a minimum cash balance out of the deposits they receive.
- The RBI oversees that the banks give loans not just to profit making businesses and traders but also to small cultivators, small scale industries and small borrowers etc.
- It is necessary to ensure the equality in the economy of the country and protect especially small depositors, farmers, small-scale industrialists, and small-scale borrowers etc.
- In this process RBI also acts as a lender of the last resort to the banks.