Question 1

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

Accepted Answer

In a barter system where goods are directly exchanged without the use of money, double coincidence of wants is an essential feature. For a successful barter transaction, both parties needed to want what the other had to offer. Money provides the crucial intermediate step that eliminates the need for double coincidence of wants. Money serves as a common medium of exchange. Instead of directly swapping goods, people use money to buy and sell. This eliminates the need to find someone who is offering the goods that is needed and in turn offer him the goods that he wants. For example, a man wants to sell books in the market and buy wheat. It is difficult to directly exchange books for wheat without the use of money. He would have to look for a wheat growing farmer who not only wants to sell wheat but also wants to buy the books in exchange. Thus, money solves this problem of finding the right person.

Question 2

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

Accepted Answer

Most loans from informal lenders carry a very high interest rate and do little to increase the income of the borrowers. The private lenders often exploit their borrowers and trap them in a vicious cycle of debt. Formal sources of credit provide loans at an affordable interest rate and help in the economial growth of an individual. Therefore, it is necessary that banks and cooperatives increase their lending particularly in the rural areas, so that the dependence on informal sources of credit reduces.

Question 3

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

Accepted Answer

The basic idea behind Self-Help Groups (SHGs) for the poor is to provide a platform where marginalized individuals, especially women, can come together. These groups pool their resources, access credit, engage in income-generating activities, and enhance their overall well-being. SHGs help overcome the problem of lack of collateral faced by poor borrowers. They offer timely loans for various purposes at reasonable interest rates, fostering self-employment opportunities and financial empowerment

Question 4

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

Accepted Answer

The Reserve Bank of India supervises the functioning of formal sources of loans. The RBI monitors the banks in maintaining cash balance. The RBI sees that the banks give loans not just to profit-making businesses and traders but also to small cultivators, small scale industries, to small borrowers etc. Periodically, banks have to submit information to the RBI on how much they are lending, to whom, at what interest rate, etc.

Question 5

Question 9Analyse the role of credit for development.

Accepted Answer

Credit plays a crucial role in a country’s development:Credit allows businesses to invest in new technologies, expand operations, and increase productivity. This leads to higher output, job creation, and economic growth.Access to credit enables entrepreneurs to start new ventures, fostering innovation and competition.Credit is used to finance large infrastructure projects such as roads, schools, and hospitals. These projects improve public services and contribute to long-term economic growth.Farmers can use credit to purchase seeds, equipment, and technology, leading to higher yields and more efficient agricultural practices.Credit enables families to invest in education, healthcare, and housing, improving their quality of life and economic potential.

Question 6

Question 10Manav 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.

Accepted Answer

Manav will decide whether to borrow from the bank or the moneylender by considering some factors like:Ease of availing loan: Manav will assess whether he meets the bank’s eligibility requirements, such as credit history, business experience, and annual revenue. Moneylenders may have more lenient eligibility criteria but may lack transparency.Interest rate applicable : Formal banks typically offer lower interest rates compared to moneylenders. Moneylenders may charge higher interest rates due to their informal nature.Collateral demanded : Banks usually require collateral (such as property or assets) to secure the loan. Moneylenders may accept personal guarantees or other forms of security.Repayment facilities : Manav will consider collateral requirements, and repayment terms set by the bank. Banks have standardized procedures. Moneylenders may have simpler processes but could impose stricter terms.Documentation : He will also consider paper work involved in the process of availing loan. Bank has to strictly follow the KYC norms.Existing high loan : Existing loans can stop him to avail fresh loan from banks.

Question 7

Question 11In 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.

Accepted Answer

(a) Banks might be unwilling to lend to small farmers because they usually cannot offer collateral security. Also, their income is highly uncertain.(b) Small farmers usually borrow from relatives, friends, employer or local money lenders.(c) The terms of credit can be unfavourable for the small farmer as they have to pay a very high interest rate, repayment period is less and their business is highly uncertain. For example, if a farmer borrows Rs 50,000 from a money lender at an interest rate of 5% per month, he will have to pay back Rs 15000 interest money and Rs 50000 principal at the end of 6th month. If his crop fails, he will still have to pay Rs 65000 to the money lender.(d) Following are the ways by which small farmers can get cheaper credit:Borrowing from Self Help Groups.Borrowing from Cooperative societies.

Question 8

Question 12Fill in the blanks:(i) Majority of the credit needs of the ............... households are met from informal sources.(ii) ............... costs of borrowing increase the debt-burden.(iii) ............... issues currency notes on behalf of the Central Government.(iv) Banks charge a higher interest rate on loans than 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.

Accepted Answer

(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 (RBI) 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.

Question 9

Question 13Choose the most appropriate answer.(i) In a SHG most of the decisions regarding savings and loan activities are taken byBank.Members.Non-government organisation.(ii) Formal sources of credit does not includeBanks.Cooperatives.Employers.

Accepted Answer

(i) Members.(ii) Employers.

Question 10

Question 3Compare the terms of credit for the small farmer, the medium farmer and the landless agricultural worker in Sonpur.

Accepted Answer

Small farmers: They are usually unable to provide collateral and given loans by local money lenders. The terms are:High rate of interest of five per cent per month (60% per annum).Repayable in a year.Medium farmer: They provide land or farm machines as collateral. They usually avail loan from commercial banks. The terms are:Low rate of interest i.e. 8.5 per cent per annumLoan can be easily paid in the next 2-3 years.Landless agricultural workers of Sonpur: The terms are:Borrowers pay their debt by working on land of their moneylenders or landowners so that in future again they will be able to borrow from that person in need.The rate of interest is high i.e 5% per month.

Question 11

Question 7Talk to some people to find out the credit arrangements that exist in your area. Record your conversation. Note the differences in the terms of credit across people.

Accepted Answer

I talked to a few people living in my area and asked them what are the terms and conditions when they apply for loan and from where do they borrow. Different people gave different replies:Few said that they don’t borrow money as they can’t afford to repay the debts on time so they stay away from borrowing and lending.Some of them said that they borrow money from relatives and friends as there is low rate of interest required and sometimes no rate of interest as well.Few of them said that they borrow money from commercial banks and bank charges high rate of interest and also ask for some collateral and many more documentation formalities etc.Some people still borrow from local money lenders at very high rate for short terms. It is because they provide faster loan and with least documentation.

Question 12

Question 1What are the differences between formal and informal sources of credit?

Accepted Answer

Formal sources of creditInformal sources of creditThese are loans from banks and cooperatives.These include moneylenders, traders, employers, relatives and friends.The Reserve Bank of India supervises the functioning of formal sources of loans.There is no control or supervision.They offer structured lending products with defined terms, conditions, and repayment schedules.Terms and conditions vary according to the lenders' wish.The terms are fixed and do not change from person to person.Informal sources often offer flexible terms as per the need of borrower.

Question 13

Question 4Why do you think that the share of formal sector credit is higher for the richer households compared to the poorer households?

Accepted Answer

The share of formal sector credit is higher for the richer households compared to the poorer households because:Richer households can offer collateral to formal sectors while poor households usually do not have any asset to offer as collateral.Formal loans require extensive documentation (e.g., proof of income, tax returns, business records). Richer households are better able to provide these documents, while poorer households might struggle with this requirement.Richer households are more aware of the products and services offered by formal financial institutions. This knowledge gap can limit poorer households' ability to access formal credit.Richer households typically have more stable and higher incomes, making them more attractive to formal lenders. Poorer households may have irregular and lower incomes, increasing the perceived risk for formal lenders.Poorer households may have longstanding relationships with informal lenders and may trust them more than formal institutions. Richer households are more likely to have established relationships with banks and other formal lenders.

Money and Credit

Exercise

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