MADE EASY SCHOOL, Bandhwari, Gurgaon

2024-25

Grade: X Subject: Economics

Month: November Ch3 Sectors of Economy

Draw the given concept map in notebook

A. Very short answer type questions. (2marks)

Q1. NCERT Q1
In situations with high risks, credit might create further problems for the borrower.
Explain? A1.
a. High-risk situations occur in rural areas because there the main demand for credit is for
crop production which involves considerable costs on seeds, fertilisers, pesticides, water,
electricity, repair of equipment.
b. There is a minimum stretch of three of four months between the time when farmers buy
these inputs and when they sell the crop.
c. Farmers generally take crop loans at the beginning of the season and repay the loan after
harvest.
d. Repayment of the loan is crucially dependent on the income from farming. e. If a crop
fails due to shortage of rain or for any other reason, a small farmer has to sell a part of the
land to repay the loan.
f. Failure of crops create further problems for the borrowers. Credit does not improve his
earnings but leaves him worse off than before. Credit in high risks situations pushes the
borrower into a debt trap, a situation from which recovery is very painful.
MADE EASY SCHOOL, Bandhwari, Gurgaon
 2024-25

Q2. NCERT Q2
How does money solve the problem of double coincidence of wants? Explain with example of your
own. A2.
In a barter system where goods are directly exchanged without the use of money, double coincidence of
wants is an essential feature. 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, it is no longer
necessary for the farmer to look for a book publisher who will buy his cereals at the same time sell him
books. All he has to do is find a buyer for his cereals. If he has exchanged his cereals for money, he can
purchase any goods or service which he needs. This is because money acts as a medium of exchange.

Q3. NCERT Q3
How do banks mediate between those who have surplus money and those who need
money? A3.
a. People hold money as deposits with banks which pay an interest rate on them.
b. People do not withdraw their cash daily.
c. The banks, therefore, hold only 15 percent of their deposits as cash with themselves in order to
pay the depositors who might come to withdraw money from the bank on any given day. d. Since,
on any particular day, only some of its many depositors come to withdraw cash, the bank is able to
manage with this cash.
e. They use a major portion of the deposits to extend loans to those who need money. f. The
banks make use of deposits to meet the loan requirements of the people. g. Thus, in this way, the
banks mediate between those who have surplus money and those who
need money. Banks charge a higher interest rate on loans than what they offer on deposits. The
difference between the two is the main source of income of the banks.

[Link] is credit?
A4. Credit (loan) refers to an agreement in which the lender supplies the borrower with money, goods or services in
return for the promise of future payment.

Q5. What is debt-trap?

A5. When a borrower particularly in rural area fails to repay the loan due to the failure of the crop, he is unable to
repay the loan and is left worse off. This situation is commonly called debt-trap. Credit in this case pushes the
borrower into a situation from which recovery is very painful.

Q6. What is a collateral?

A6. Collateral is an asset that the borrower owns (such as land, building, vehicle, livestock, deposits with banks) and
uses this as a guarantee to a lender until the loan is repaid.

B. Short answer type questions. (3marks)

Q7. Why is modern currency accepted as a medium of exchange without any use of its own? Find out the
reason. A7.
Modern currency is accepted as a medium of exchange without any use of its own due to reasons as mentioned
below:

∙ In India, the Reserve Bank of India issues currency notes on behalf of the central government. ∙
As per Indian law, no other individual or organisation is allowed to issue currency.
∙ The law legalises the use of rupee as a medium of payment that cannot be refused in settling transactions in
India.
 MADE EASY SCHOOL, Bandhwari, Gurgaon
2024-25

∙ No individual in India can legally refuse a payment made in rupees. Hence the rupee is widely accepted as a
medium of exchange.

Q8. Describe two different credit situations where credit plays a positive role and a negative role.
Or
Describe the positive role of credit with examples.

A8. Two different credit situations where credit plays a positive and a negative role are as given below:

1. Credit and a positive role: A trader obtains credit to meet the working capital needs of production. The credit
helps him to meet the on-going expenses of production, complete production on time and thereby increase
his earnings. Thus he is able to repay the loan that he had borrowed in time. In such a situation credit plays a
positive role and the borrower is able to improve his condition.

2. Credit and a negative role: A farmer takes a loan to meet the expenses of cultivation hoping that there would
be good harvest and he would repay the loan. The harvest, however, fails and the farmer is unable to repay
the loan. Next year again he takes loan but the crop is not good and loan repayment cannot be made. The
borrower has no option but to sell a part of his land to pay off the loan. Loan/credit instead of helping the
farmer improve his condition left him worse off. He falls into debt-trap. Credit in this case pushes the
borrower into a situation from which recovery is very painful. Thus, in one situation credit helps to increase
earnings and the person is better off than before. In the second situation credit pushes the person into a debt
trap and he has to sell a part of his land.

Q9. What are the differences between formal and informal sectors of credit or loans?
Or
Explain any two features each of formal sector loans and informal sector loans.
A9. The main differences between formal sector and informal sector loans are as given below:
Formal sector Informal sector

(1) Formal sector source are banks and cooperatives. (2) (1) Informal sector sources are moneylenders,

The banks and cooperatives charge less rate of interest traders, employers, relatives and friends. (2)

i.e., about 10 per cent per annum or so. Informal sector sources charge higher interest i.e.,

(3) It results in more income and better condition of about 3 to 5 per cent per month.

the borrower. There is improvement in his financial (3) Higher rate of interest results in less income
for the borrowers. It sometimes leads to
condition. (4) Reserve Bank of India supervises the debt-trap.

functioning of formal sources of loans. (4) There is no organisation which supervises the
credit activities of the lenders in the informal
sector. They do whatever is in their interest.
Q10. What are Self-Help Groups? Describe in brief their functioning including their aim and importance. A10. A
typical Self-Help Group has 15-20 members, usually belonging to one neighbourhood who meet and save
regularly.
The functioning of SHGs is as given below:
MADE EASY SCHOOL, Bandhwari, Gurgaon
2024-25

1. Aim: The aim of Self-Help Group is to organise rural poor, women in particular and collect their savings and to
take loans from the group to meet their needs. The group takes loan from the bank to create self employment
opportunities for the members.
2. Working of the SHG: Decisions on loans and savings are taken by the group members. All matters relating to
the purpose, amount, interest rate, repayment schedule are decided by the group members. The group is
responsible for the repayment of the loan. Non-repayment of loan by any member is followed up seriously by
other members of the group.
3. Importance:
(a) SHGs have helped borrowers overcome the problem of lack of collateral because the banks are willing to
lend to the poor women organised in SHGs, even though they have no collateral as such. (b) The borrowers
can get timely loans at a reasonable interest rate.
(c) It has helped women in the rural areas to become financially self-reliant.
(d) The meetings of the groups provide a platform to discuss and act on a variety of social issues such as
health, nutrition and domestic violence.

C. Long answer type questions. (5marks and 5valid points or 120 words)

Q11. Explain the three terms of credit.

A11
The terms of credit are as mentioned below :

1. Interest rate.
2. Collateral and documentation requirement.
3. Mode of repayment.

The terms of credit vary substantially from one credit arrangement to another

Interest rate in the formal sector e., banks and cooperative is about 9-10 per cent but in informal sector, the
moneylender and grain merchants etc. charge much higher interest. Thus the cost to the borrower of informal loans
is much higher.

Moneylenders take collateral such as land. As the interest rate is higher and if the borrower is unable to repay for
any reason, they try to exploit the borrower by taking control of the collateral like land etc.
Banks insist on documentation requirement and collateral before granting loans. That is why it becomes difficult for
the poor to get loans from the banks.

Q12. Deposits in the banks are beneficial to the depositors as well as to nation.” Examine the statement.

A12.

a. Deposits are beneficial to the depositors

∙ Banks accept the deposit and pay as interest rate on the deposits.
∙ Money is safe with the bank.
∙ People (depositors) may withdraw the money as and when they require.
∙ Depositors may make payments through cheques instead of cash.

b. Deposits are beneficial for the banks

MADE EASY SCHOOL, Bandhwari, Gurgaon
2024-25

∙ Banks keep only a small proportion of deposits. Now a days, banks keep about 15 per cent as cash in order to
pay the depositors who might come to withdraw money from the bank on any given day. ∙ Bank use the major
portion of the deposits to extend loans. There is huge demand for loans for various economic activities. Banks
make use of the deposits to meet the loan requirements of the people. Businessmen and other entrepreneurs
take loans from the banks and open factories. They help in the advancement of the economy. Thus the deposits
are beneficial to the nation.

Q13. Explain the role of Self-Help Groups (SHGs) in rural society.

A13. The role of Self-Help Groups (SHGs) in rural society are:
∙ Members of SHGs can take small loans from the group itself to meet their needs.
∙ The group charges less rate of interest on these loans.
∙ After a year or two, it becomes eligible for availing loan from the bank.
∙ The group is responsible for the repayment of the loan.
∙ Any case of non-repayment of a loan by any one member is followed up seriously by other members of the
group.
∙ The SHGs help borrowers overcome the problem of lack of collateral.
∙ They can get timely loans for a variety of purposes and at a reasonable interest rate. ∙
SHGs help women to become financially self-reliant.
∙ The regular meetings of the group provide a platform to discuss and act on a variety of social issues such as
health, nutrition, domestic violence, etc.

Q14. Why do we need to expand formal sources of credit in India? Explain.

Or,
Why are formal sources of credit preferred over informal sources of credit? Give three reasons.
Or,
Why is it necessary that banks and co-operatives increase their lending in rural areas?
Explain. A14. Formal sources of credit need to be expanded in India because:
∙ To save people from the exploitation of the informal sector
∙ To save and reduce the dependence on informal sources of credit
∙ Formal sources charge a low rate of interest on loans.
∙ Higher Income through cheap borrowing
∙ To save from debt trap and exploitation.
 ∙ It provides cheap and affordable credit. Cheap and affordable credit is crucial for the country’s development ∙
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 businesses and traders. ∙ It is
important that formal credit is distributed more equally so that the poor can benefit from cheaper loans.