NCERT Solutions for Class 10 Social Science Economics Chapter 3 Money and Credit Economy help students to score good marks in the exams. These NCERT Solutions are prepared by expert teachers and based on the latest pattern and latest edition NCERT book. Here we have provided answers to all the questions in a very easy language.
Class 10 Economics Chapter 3 Money and Credit Questions and Answers
EXERCISES
Question 1: In situations with high risks, credit might create further problems for the borrower. Explain.
Answer: In high-risk situations, credit can lead to a debt trap for borrowers, especially if they face unexpected challenges like business failures or poor agricultural yields. High-risk credit often comes with higher interest rates, which can further increase the debt burden if the borrowers don’t succeed in paying the loan. Failure to repay can result in the loss of assets pledged as collateral and negatively impact the borrower’s credit score, making future borrowing more difficult. Additionally, the stress of being unable to repay loans can have significant psychological impacts. Therefore, managing credit in such contexts requires caution to avoid exacerbating the borrower’s financial and personal difficulties.
Question 2. How does money solve the problem of double coincidence of wants? Explain with an example of your own.
Answer: Money effectively solves the problem of double coincidence of wants, which is a major limitation in a barter system. In a barter system, for a transaction to occur, both parties must want what the other is offering at the same time.
For example, imagine a farmer who grows apples and needs a pair of shoes. In a barter system, the farmer would have to find a shoemaker who wants apples in exchange for shoes. This could be quite difficult and time-consuming.
Money eliminates this problem. With money as a medium of exchange, the farmer can sell the apples to anyone who wants them and get money in return. The farmer can then use this money to buy shoes from a shoemaker, irrespective of whether the shoemaker wants apples or not. Money, therefore, acts as a common medium that everyone accepts and can be used to facilitate exchanges for a wide variety of goods and services, making transactions much simpler and more efficient.
Question 3. How do banks mediate between those who have surplus money and those who need money?
Answer: Banks accept deposits from people who have surplus money, paying interest on these deposits. The banks use the major portion of these deposits to extend loans to those who need money, charging them slightly higher interest than what they pay to the depositors. The difference in interest rates generates profits for the bank. In this way, banks mediate between those who have surplus money and those who need money.
Question 4. Look at a 10 rupee note. What is written on top? Can you explain this statement?
Answer: “Reserve Bank of India” and “Guaranteed by the Central Government” is written on the top of a 10 rupee note. This statement signifies that the note is issued by the Reserve Bank of India (RBI), which is the central bank of India on behalf of the central government. Below the above statements there is one more statement i.e., “I promise to pay the bearer the sum of Ten Rupee.” It means that the RBI’s governor promises to pay the bearer the sum of ten rupees on demand.
Question 5. Why do we need to expand formal sources of credit in India?
Answer: We need to expand formal sources of credit in India due to:
- To reduce dependence on informal sources of credit as they charge high-interest rates and do not benefit the borrower much.
- Cheap and affordable credit is essential for the country’s development. Formal credit sources can provide the necessary capital for businesses to start, sustain, or expand.
- Formal banking encourages savings and channelizes them into investments. This leads to more capital formation and economic development.
- Formal credit institutions are regulated and offer more security to depositors and borrowers, ensuring stability in the financial system.
Question 6. What is the basic idea behind the SHGs for the poor? Explain in your own words.
Answer: The basic idea behind Self-Help Groups (SHGs) is to empower poor people particularly rural poor women through collective action and mutual support. These groups are typically formed by individuals who share similar socio-economic backgrounds, often comprising financially backward people. The core principles involve pooling small savings into a common fund from which members can borrow, usually at a lower interest rate than what’s available from traditional banks or informal lenders.
SHGs function on the concept of mutual trust, cooperation, and democracy. Members save together and lend to each other, which not only helps them manage their finances but also builds a sense of community. This approach is crucial for those who have limited access to formal banking services.
Question 7. What are the reasons why the banks might not be willing to lend to certain borrowers?
Answer: Banks might be hesitant to lend to certain borrowers for several reasons:
- Credit Risk: Borrowers with a history of late payments, defaults, or other negative credit events may be seen as high-risk borrowers.
- Insufficient Collateral: Borrowers who cannot provide adequate collateral to secure the loan pose a higher risk to banks in case of default.
- Unstable Income: Individuals with irregular or unstable income sources may be perceived as less likely to repay loans consistently.
- Lack of Documentation: In many cases, especially in informal sectors, borrowers lack the necessary documentation required for loan processing, such as proof of income, identity, or residence.
- New Businesses: Startups or new businesses without a proven track record or steady cash flow might be considered risky investments by banks.
- Sector-Specific Risks: Certain sectors or industries might be risky due to their nature or market volatility, making banks cautious about lending to businesses in these areas.
Question 8. In what ways does the Reserve Bank of India supervise the functioning of banks? Why is this necessary?
Answer: Reserve Bank of India is the central bank of the country and works as the supervising authority over other banks across the country. The Reserve Bank of India supervises the functions of banks in a number of ways:
- The RBI ensures that banks maintain a minimum cash balance out of the deposits they receive. This is crucial for the liquidity management of banks.
- Banks are required to periodically submit information to the RBI about their lending activities. This includes details on how much they are lending, to whom, and at what interest rates.
- RBI observes that the banks give loans not just to profit making businesses and traders but also to small cultivators, small scale industries, small borrowers etc.
- The RBI is responsible for issuing licenses to new banks and regulating their operations.
- The RBI also regulates banks’ foreign exchange transactions to maintain the stability of the Indian currency.
RBI’s supervision is necessary to ensure equality in the economy of the country and protect especially small depositors, farmers, small scale industries, small borrowers etc. Further, RBI monitoring prevents banking crises and ensures the stability of the financial system. It also promotes responsible lending practices in the banking sector.
Question 9. Analyse the role of credit for development.
Answer: Credit is really important for growth and development. It helps in different ways:
- It gives money to businesses to expand operations and innovate.
- Farmers can buy things they need like seeds and tools, leading to increased agricultural productivity and profitability.
- It helps poor people start small businesses, improve their homes or invest in education.
- People can buy big things like houses and cars with credit boosting demand for goods and services.
- It helps more people use bank services.
OR
Credit plays a crucial role in development by providing essential capital for various economic activities. It enables businesses, especially small and medium enterprises, to invest, expand, and innovate, driving economic growth. In rural areas, credit helps farmers improve agricultural productivity by funding the purchase of seeds, equipment, and fertilizers. It’s instrumental in poverty reduction, allowing individuals to start businesses, enhance their homes, or invest in education. Credit also boosts consumer spending on major purchases, stimulating demand in the economy. Additionally, it promotes financial inclusion, integrating more people into the formal banking system. Managed responsibly, credit acts as a catalyst for growth and improved living standards.
Question 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 will decide whether to borrow from the bank or the money lender on the basis of the following terms of credit:
- Rate of interest
- Requirements availability of collateral and documentation required by the banker.
- Mode of repayment. The penalty in case of default in repayment.
Terms of repayment are different of bank and the money lender. Whichever he finds easier he can consider that. Depending on these factors and of course, easier terms of repayment, Manav has to decide whether he has to borrow from the bank or the moneylender.
Question 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?
(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.
Answer: (a) Banks might hesitate to lend money to small farmers in India because farming income can be uncertain due to things like bad weather or pests, making it risky for banks. Also, farmers often don’t have enough valuable things like property to guarantee their loans. Handling many small loans can be expensive for banks. Additionally, small farmers often lack a formal credit history, so banks don’t know if they can trust them. Sometimes, the farmers don’t earn enough money from their crops to repay big loans, which worries the banks.
(b) Small farmers in India, who may find it difficult to borrow from banks, often turn to alternative sources for credit such as local money lenders, agricultural traders, big landlords, cooperatives and SHGs, friends and relatives etc.
(c) A farmer needs a loan for planting season but can’t get it from a bank. He turns to a moneylender who lends him the money at a very high interest rate, say 30%. Additionally, the loan is secured against the farmer’s land. Due to unforeseen circumstances like a poor harvest, the farmer struggles to repay. Since the farmer couldn’t pay the money now he had to give his land to moneylender. This scenario highlights how high interest rates and harsh repayment terms can trap small farmers in a debt trap and insecurity.
(d) The small farmers can get cheap credit from different sources like – Banks, Agricultural Cooperatives, and SHGs.
OR
Ways for Small Farmers to Get Cheap Credit:
- Cooperative Societies: Joining agricultural cooperatives can help farmers access loans with lower interest rates.
- Government Schemes: Utilizing government-initiated credit facilities and subsidy schemes designed for small farmers.
- Microfinance Institutions: These institutions often provide loans with more reasonable terms than traditional moneylenders.
- Self-Help Groups (SHGs): Becoming a member of an SHG can enable farmers to avail of loans at lower rates.
- Kisan Credit Cards: These cards, provided by various banks, offer farmers short-term loans at subsidized rates.
- Collaborative Farming: Pooling resources with other farmers can reduce individual costs and improve creditworthiness.
Question 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.
Question 13. Choose the most appropriate answer.
(i) In an SHG most of the decisions regarding savings and loan activities are taken by
(a) Bank.
(b) Members.
(c) Non-government organisation.
Answer: (b) Members.
(ii) Formal sources of credit do not include
(a) Banks.
(b) Cooperatives
(c) Employer
Answer: (c) Employers
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