NCERT Solutions For Class 10 Economics Chapter 3 Money And Credit

NCERT Solutions For Class 10 Economics Chapter 3 Money And Credit Long Answer Questions

Question 1. Differentiate between Reserve Bank of India (RBI) and Commercial Bank.

Or

What is the difference between the Reserve Bank of India and the Commercial Bank?

Answer:

Question 2. Explain any two features of formal sector loans and informal sector loans.

Answer:

Formal Sector Loans: Formal sector loans include loans from banks and cooperatives. Features of formal sector loans are:

Formal sectors provide cheap and affordable loans and their rate of interest is monitored by the RBI.

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The formal sector strictly follows the terms of credit which include interest rate, collateral, documentation and the mode of repayment.

Informal Sector Loans: Informal sector loans include loans from moneylenders, traders, employers, relatives, friends, etc. Features of informal sector loans are:

1. Their credit activities are not governed by any organisation, therefore they charge a higher rate of interest.
2. Informal sector loan providers know the borrowers personally, and hence they provide loans on easy terms without collateral and documentation.

Question 3. What are the two main reasons for formal credit not being available to the rural poor? Why is there a need to expand rural credit?

Answer:

The Two Main Reasons For Formal Credit Not Being Available To The Rural Poor Are:

1. The absence of collateral and documentation is the main reason which prevents the rural poor from getting bank loans.
2. The arrangements of informal sector loans are flexible in terms of timelines, procedural requirements, interest rates, etc. They are adjustable according to the needs and convenience of the borrower.

There Is A Need To Expand Rural Credit From The Side Of Formal Sector Because:

1. Informal sectors exploit the rural poor by putting them in debt traps.
2. Cheap and affordable credit for the rural poor is important for the country’s overall development.

Question 4. Why do rural borrowers depend on the informal sector for credit? What steps can be taken to encourage them to take loans from formal sources? Explain any two.

Answer:

The Rural Borrowers Depend On The Informal Sector For Credit Because:

1. Absence of collateral and documentation with rural borrowers.
2. Flexible loans in terms of timelines, interest rates, procedural requirements, etc., are provided to rural borrowers by informal sectors.

Steps That Can Be Adopted To Encourage Them To Take Loans From The Formal Sources Are:

1. Awareness among rural borrowers against the exploitation of informal sectors. Need to be aware of the regarding high rates of interest and debt traps made by such moneylenders.
2. Promotion to self-help groups. These groups collect their savings as per their own ability to save. Members can take small loans from the groups to meet their requirements. If the group is regular in savings for a year or two, it can avail loan from the bank.

Question 5.‘Cheap and affordable credit is crucial for the country’s development. Explain the statement with four points.

Answer:

If the loans are cheap and affordable, this can lead to the country’s development in the following ways:

1. Cheap loans result in higher incomes and higher profits which can help in the expansion of business.
2. More and more people can benefit from the loans in their businesses.
3. This can help in making more and more agricultural activities, small-scale industries, etc.
4. Credit can be distributed more equally which helps to benefit the poor by the help of cheaper loans.

Question 6. Answer the following questions:

1. Why are banks unwilling to lend loans to small farmers?
2. Besides banks, what are the other sources of credit from which the small farmers can borrow?
3. Explain how terms of credit can be unfavourable for small farmers.
4. From where can small farmers get cheap loans?

Answer:

1. Banks provide loans after collateral and documentation securities, which generally the small farmers failed to comply with. Therefore, banks are unwilling to lend loans to small farmers.
2. There are several informal sources of credit like landlords, moneylenders, traders, relatives friends, etc.
3. Terms of informal credit can put the small farmers into debt-traps. Higher rates of interest and unfavourable conditions exploit farmers by the situation of multiple loans.
4. Farmers can get cheap and safe loans from formal credit providers, i.e., banks and cooperative societies.

Question 7. Which are the two major sources of formal sector credit in India? Why do we need to expand formal sources of credit?

Answer:

The two major sources of formal sector credit in India are — commercial banks and cooperative societies.

We need to expand formal sources of credit for to following reasons:

1. Informal sources of credit exploit the poor resulting in putting them into debt traps.
2. Formal sources of credit are cheaper and thus they help in the country’s development.

Question 8. What is meant by terms of credit? What does it include?

Answer:

Terms of credit are the requirements that need to be satisfied for any credit arrangements.

It includes interest rate, collateral, documentation and mode of repayment. However, the terms of credit vary depending upon the nature of the lender, borrower and loan.

Question 9. How does the Reserve Bank of India supervise the functioning of banks? Why is this necessary?

Answer:

Reserve Bank Of India (RBI) Supervises The Banks In The Following Ways:

1. It monitors the balance kept by the banks for day-to-day transactions.
2. It checks that the banks give loans not just to profit-making businesses and traders but also to small borrowers.
3. Periodically banks have to give details about lending, borrowers and interest rates to RBI.
4. It is necessary for securing public welfare. It prevents the banks from running the business with profit motive only.
5. It also keeps a check on interest rate of credit facilities provided by the banks. RBI makes sure that the loans from the banks are affordable and cheap.

Question 10. Describe the four features of Self-Help Group (SHG). _

Answer:

The Features Of Self-Help Group (SHG) Are:

1. People form their personal groups for the purpose of savings and also lend money among themselves.
2. The rate of interest is lower than informal service providers.
3. They can also avail of loans from banks if their savings are regular.
4. Decisions regarding the savings and loan activities are taken by group members.

Question 11. What is a double coincidence of wants? How has money solved this problem?

Or

Define double coincidence of wants. How does money help to overcome it?

Answer:

Things exchanged for other things without the use of money is known as a barter system. The barter system laid the foundation of trade but trade was limited to the bounds of a village or town.

Hence, in a barter system when both parties agree to sell and buy each other’s commodities, it is known as a double coincidence of wants.

Whatever commodity a person desires to sell is exactly what commodity the other wishes to buy. Without a double coincidence of wants, the exchange of goods is not possible. Therefore, it is an essential feature.

Money eliminates the need for a double coincidence of wants. One can easily exchange their goods in exchange for money and later on pay money for the desired commodities.

Money acts as an intermediate in the process of exchange. It is called a medium of exchange.

Question 12. Differentiate between formal and informal sources of credit.

Answer:

Question 13. Mention four characteristics of each of the formal and informal sources of credit in India.

Or

Write three features each of formal and informal sources of credit:

Answer:

Features Of Formal Sources Of Credit Are:

1. Formal sources of credit are provided by banks and cooperative societies to the borrowers.
2. The Reserve Bank of India (RBI) governs the functioning of formal sources of credit. RBI periodically checks the interest rate and other details of these sources.
3. They follow proper terms of credit which include collateral, documentation, rate of interest and mode of repayment.
4. They provide cheap and affordable credits with common terms of credit for all.
5. Features Of Informal Sources Of Credit Are:
6. Informal sources of credit are moneylenders, traders, employers, relatives, friends, etc.
7. There is no government or private organisation that manages or checks the credit activities performed by informal sources.
8. Their terms of credit are flexible for the personal benefit of the lenders and the condition of borrowers.
9. They generally charge higher rates of interest and exploit the borrowers for their own benefits.

Question 14. Study the table given below and answer the questions that follow:

1. Poor households’ share of formal credit in urban areas is low compared to that of rich households. Why is it so?
2. Mention two difficulties faced by the poor households in taking loans from a formal sector.

Answer:

Poor households’ share of formal credit in urban areas is low as compared to that of rich households due to the following reasons:

1. The poor generally lack collateral guarantees and do not have a proper mode of repayment.
2. Informal sources of credit are generally flexible in timings, rate of interest, repayment schedule, etc.

Therefore, it is easier for the poor to approach moneylenders as they know them personally.

1. The poor are not able to satisfy general terms of credit mostly collateral guarantees.
2. Informal moneylenders know the poor borrowers personally and are therefore flexible in terms of repayment schedule, amount of interest, etc.

Question 15. What are the modern forms of money currency in India? Why is it accepted as a medium of exchange? How is it executed?

Answer:

Modern forms of money include currency (paper notes) and coins. It is accepted as a medium of exchange because the currency is authorised by the government of India.

No individual in India can legally refuse a payment made in rupee. Any person holding money can easily exchange it with any commodity or service that he desires. It acts as an intermediate in the exchange process of different countries.

Question 16. Why are transactions made in money? Explain with suitable examples.

Answer:

Money is accepted as a medium of exchange because the currency is authorised by the government of India. In money transactions, money can be paid for any goods or services one desires.

For example: the producer of shoes may want wheat in exchange for his shoes. But he may find it difficult to find a person who is also willing to exchange his wheat for shoes.

So simultaneous fulfilment of mutual wants is the first and foremost condition to buy and sell the commodity.

In money transactions, one can buy a commodity whenever one wants it. One does not have to wait for another person to agree to an exchange of goods.

Question 17. Why should credit at reasonable rates be available for all?

Answer:

If credit is available at a reasonable rate, this would lead to higher income and many people could then borrow for a variety of needs such as for growing crops, setting up small-scale industries, for business, etc.

Thus credit at a reasonable rate will be helpful in the development process of a country.

Question 18. How is credit helpful for the country’s development?

Answer:

Large numbers of transactions in our day-to-day activities involve credit in some form or the other.

The credit helps people to meet the ongoing expenses of production, complete production on time and thereby increase their earnings.

Hence, it plays a vital and positive role in a country’s development.

Question 19. What is the basic idea behind the SHGs for the poor? Explain in your own words.

Answer:

The basic idea behind the SHGs for the poor is to provide credit facilities at a cheaper rate and also without much documentation process.

An SHG has 15-20 members, usually from the neighbourhood, who meet and save regularly in the range of ₹25 to ₹100 or more.

The amount which is collected by an SHG is utilized to give a loan to a member of the group.

Now the group decides as regards the loans to be granted, the purpose, amount, interest to be charged, and its repayment schedule.

Question 20. What are the various sources of credit in rural areas? Which one of them is the most convenient source of credit? Why is it most convenient? Write two reasons.

Answer:

Various Sources Of Credit In Rural Areas Are:

1. Agricultural traders
2. Moneylenders
3. Commercial banks
4. Cooperative societies
5. Relatives and friends

The Most Convenient Source Of Credit Is A Moneylender Because Of The Following Two Reasons:

1. There is no need for a documentation process while taking a loan from informal sources (moneylenders).
2. No collateral is required. Collateral is an asset that the borrower owns (such as land, building, livestock, etc.) and is used as a guarantee to the lender until the loan is repaid.

Question 21. What are the advantages of a demand deposit? What values are imparted by this gesture?

Answer:

Following Are The Advantages Of A Demand Deposit:

1. A demand deposit is safe
2. It earns interest
3. It can be withdrawn when required
4. Payments can be made through cheques

Values:

1. Creating awareness
2. Responsibility
3. Discipline
4. Savings
5. Care and concern

Question 22. What values should the hank keep in mind while extending loans?

Answer:

These Values Are:

1. Social and economic justice
2. Care and concern for society

Question 23. Which two values do these societies promote?

Answer:

Co-operative societies are formed when people with common interest come together and pool their- resources to help each other. These promote values such as mutual cooperation, self-reliance and teamwork.