Topic: Money and Credit (Eco)

[Link] Barter System by giving an example.

Ans: • Barter system is a system where goods are exchanged directly without the use of money. • Double
coincidence of wants (i.e. a person desires to sell exactly what the other person wishes to buy) is an
essential feature of the Barter System.
[Link] does money solve the problem of double coincidence of wants? Explain with an example.
Ans. ▪ Double coincidence of wants is an essential feature in a barter system where goods are directly
exchanged without the use of money. But on the other hand, in an economy where money is in use,
money by providing the crucial intermediate step eliminates the need for double coincidence of wants. ▪ A
person holding money can easily exchange it for any commodity or service that he or she might want.
▪ For example: It is no longer necessary for the shoemaker to look for a farmer who will buy his shoes and
at the same time sell him wheat. Once the shoe manufacturer exchanges his shoes for money, he can
purchase wheat or any other commodity in the market.
3.“Why is modern currency accepted as a medium of exchange without any use of its own”is accepted by
all ?
• Modern currency is accepted as a medium of exchange because the currency is authorized by the
government of the country. • In India, the Reserve Bank of India issues currency notes on behalf of the
central government. • Indian law legalizes the use of rupee as a medium of payment that cannot be refused
in setting transactions in India. • No individual in India can legally refuse a payment made in rupees.
[Link] are the deposits in the banks called ‘demand deposits’?
Ans: People deposit the surplus or extra money in the banks. The deposits can be drawn at any time on
demand by the depositors. That is why they are called demand deposits. The benefits of deposits are as
follows: • Banks accept the deposit and pay an 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.
[Link] do banks mediate between those who have surplus money and those who need money?
Ans. • A bank mediates between those who have surplus money and those who need money by allowing
both to open accounts with it. • Banks accept deposits from people who have surplus money, paying
interest on these deposits. • The banks use the major portion of the deposits to extend loans to those who
need money, charging them slightly higher interest than what they pay to the depositors. • In this way
banks mediate between those who have surplus money and those who need money.
[Link] is collateral? Why do banks ask for collateral while giving credit to a borrower?
Ans: • Collateral is an asset that the borrower owns (land, building, vehicle, livestock, land documents,
deposits with banks, etc.) which stands as a security against the money borrowed. • In case the borrower
fails to repay the loan, the lender has the right to sell the asset or collateral to recover the loan money.
Most lenders ask for collateral while lending as a security against their own funds.
[Link] does credit play a negative or positive role?
Positive role of credit: - • Credit plays a positive role when the borrower is able to return the loan amount
on time and also makes some profit with the use of that money. • For example: Salim, a shoe
manufacturer took a loan from different sources to complete the order of 3000 pairs of shoes, in the end
he delivered the order, made profit and repaid the loan. In such a situation credit plays a positive role and
the borrower is able to improve his condition.
Negative role of credit: - • Sometimes credit is very painful as it pushes the borrower into such a situation
from which recovery is very difficult. In this situation the borrower is not able to repay the loan and many
times caught into the situation of debt-trap. • For example: -a small farmer Swapna takes a loan to meet
the expenses of cultivation hoping that there would be a 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 out a 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.
[Link] the main differences between formal sector credit and informal sector credit.
The credit is provided by Banks and Cooperatives in formal sector while The credit is provided by
Moneylenders, Traders etc.
The Reserve Bank of India (RBI) organize the functioning of formal sources of loans while
Formal sector charge reasonable interest as compared to informal lenders on credit.
Formal sector need more documentation and collateral than informal sector.
Formal sector has some rules and boundaries to get the money back while No one can stop informal
sectorusing unfair means to get their money back.
[Link] the significance of The Reserve Bank of India in the Indian economy.
Ans. The Reserve Bank of India is the apex of the country, supervising the functioning of formal sources
of credit as: • It monitors that the banks maintain the required cash balance with them. • It supervises that
the banks give loans not just to profit making businesses and trade but also to small cultivators, small
scale industries etc. • It is mandatory for the banks to submit information to RBI periodically on how
much they are lending, at what interest rate and to whom. • It issues guidelines for fixing rate of interest
on deposits and lending by banks.
[Link] is cheap and affordable credit crucial for the country’s development? Explain with reasons.
Ans. Cheap and affordable credit is crucial for the country’s development because:
• More lending would lead to higher incomes and encourage people to invest in agriculture, engage in
business and set up small industries. • Cheap credit will enable more investment. This led to an
acceleration of economic activity. • Cheap credit would also follow weaker sections of society to access
the formal sector of lending and get rid of informal money lenders. • Affordable credit would also end the
cycle of debt trap. • Cheap and easy forms of credit would inspire better investment in technology and
thus increase competition.
[Link] the bad effects of informal sources of credit on borrowers.
Ans. The bad effects of the informal sources of credit on borrowers are mentioned below: • The informal
sources of credit include moneylenders, traders, lenders, relatives, and friends. • The informal sources of
credit exploit the people by charging exorbitant rate of interest. This makes the cost of borrowing even
higher. • The higher cost of borrowing indicates that a large part of the earning of the borrowers will be
used to repay the loan. They will have less income left for themselves. • Those people who wish to start
their own business by borrowing may not be able to do so due to this high cost.
[Link] what ways do Self-Help Groups help the rural sector of the economy?
Ans. The basic objective of ‘Self Help Groups’ is to organize rural poor, particularly women belonging to
one neighborhood into small Self-Help Groups (15-20 members). These members save regularly and the
amount varies from ₹25-100 or more depending upon their ability to save.
Advantages of ‘Self Help Groups’ are as follows: •
The members can take small loans from the group itself to meet their needs. The group charges interest on
these loans which is still less than what moneylenders charge. • After a year or two, if the group is regular
in savings, it becomes eligible for availing loan from the bank which is sanctioned in the name of the
group to create self-employment opportunities. • All important decisions regarding loan, purpose, amount
of interest, non-payment of loan are taken by the group members. • For instance, small loans are provided
to the members for releasing mortgaged land, meeting working capital needs, for acquiring assets like
sewing machines, handlooms, cattle etc. • Since non-repayment of loans is dealt with seriously by group
members, therefore banks are willing to lend to the poor women when organized in SHGs, even though
they have no collateral as such. Thus, the 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.
By- Snehlata