Money
and Credit
Choose the correct option:
1.
Which one of the following is a formal
source of credit?
(a) Traders (b)
Cooperative societies
(c) Moneylenders (d)
Friends and relatives
2.
Which one of the following is the
appropriate meaning of collateral?
(a) It is the sum total of money borrowed from banks.
(b) The amount borrowed from friends.
(c) It is an asset of the borrower used as guarantee to a lender.
(d) The amount invested in a business.
3.
Which one of the following is a
modern form of currency?
(a) Paper notes (b) Gold (c) Silver (d) Copper
4.
Which one of the following is the
newer way of providing loans to the rural poor, particularly women?
(A) Cooperative Banks (b)
Green Banks
(c) Self-Help Groups (d)
Moneylenders
5.
Which of the following is the main
informal source of credit for rural households in India?
(a) Friends (b) Relatives (c) Landlords (d) Moneylenders
6.
Name the system in which the double
coincidence of wants is an essential feature.
(a) Barter system (b)
Money economy
(c) Global economy (d)
None of these
7.
Green Bank of Bangladesh was started
in
(a) 1960s (b) 1970s (c) 1980s (d) 1990s
8.
In a SHG, most of the decisions
regarding loan activities are taken by
(a) Banks (b)
Members
(c) Non-government organisation (d) Cooperative
9.
Which of the following is not an
informal source of credit?
(a) Money-lender (b)
Relatives and Friends
(c) Commercial Banks (d)
Traders
10.
In which country is the Green Bank
meeting the credit needs of over 6 million poor people?
(a) Bhutan (b) Sri Lanka (c) Bangladesh (d) Nepal
11.
Which is not the main source of
credit from the following for rural households in India?
(a) Traders (b)
Relatives and friends
(c) Commercial Banks (d)
Moneylenders
12.
What portions of deposits are kept by
the banks for their day to day transaction?
(a) 10% (b) 15% (c) 20% (d) 25%
13.
Which households take more loans from
the formal sector?
(a) Poor households and rich household.
(b) Well off households and households with few assets.
(c) Poor households and well off households
(d) well off households and rich households.
14.
Which among these is an essential
feature of barter system?
(a) Money can easily exchange any commodity
(b) It is based on double co-incidence of wants
(c) It is generally accepted as a medium of exchange of goods with money
(d) It acts as a measure and store of value
15.
Which one of the following is the
main source of credit for the rich households?
(a) Informal (b)
Formal
(c) Both formal and informal (d)
Neither Formal nor informal
16.
Which one of the following is not a
formal source of credit?
(a) Commercial Banks (b)
State Bank of India
(c) Employers (d)
Co-operatives
17.
Which one of the following agencies
issues currency notes on behalf of the government of India?
(a) Ministry of Finance (b)
Reserve Bank of India
(c) State Bank of India (d)
World Bank
18.
Formal Sources of credit include :
(a) money lenders (b)
co-operatives
(c) Employers (d)
Finance companies
19.
Which one of the following is NOT an
informal sector loans for poor rural household in India?
(a) Commercial Banks (b)
Moneylenders
(c) Traders (d)
Landlords
20.
Which one of the following is not a
modern form of money?
(a) Demand Deposits (b)
Paper currency
(c) Coins (d)
Precious metals
21.
Identify the formal source of credit:
(a) Cooperative societies (b)
Moneylenders
(c) Traders (d)
Landlords
22.
Who helps the borrowers to overcome
the problem of lack of collateral?
(a) Self-help group (SHG) (b)
State government
(c) Employers (d)
Moneylenders
23.
Which of the following is not a
modern form of money?
(a) Paper notes (b)
Demand deposits
(c) Silver coins (d)
None of the above
24.
Formal sources of credit include
(a) banks (b)
moneylenders
(c) employers (d)
all the above
25.
Rate of interest charged by moneylenders
as compared to that charged by banks is:
(a) lower (b) same (c) slightly higher (d) much higher
26.
Which state accounts for maximum
percentage of SHGs (self-help groups) in bank credit?
(a) Andhra Pradesh (b)
Tamil Nadu
(c) Kerala (d)
Karnataka
27.
Who supervises the credit activities
of lenders in the informal sector?
(a) Central Bank of India (b)
Commercial banks
(c) Moneylenders (d)
None
28.
At present which form of money is
increasingly used apart from paper money?
(a) Commodity money (b)
Metallic money
(c) Plastic money (d)
All the above
29.
Currency is issued in India by :
(a) commercial banks (b)
regional rural banks
(c) nationalised banks (d)
Reserve Bank of India
30.
The part of the total deposits which
a bank keeps with itself in cash is
(a) zero (b)
a small proportion
(c) A big proportion (d)
100 present
31.
System of exchanging goods for goods
is called:
(a) monetary system (b)
credit system
(c) barter system (d)
exchange system
32.
Money
(a) eliminates double-coincidence of wants
(b) acts as a common measure of value
(c) acts as a standard of deferred payments
(d) all the above
CBSE Maths notes, CBSE physics
notes, CBSE chemistry notes
2016
Very Short Answer Type Questions [1 Mark]
Question 1.
How do the deposits with the banks become their source of income?
Answer:
Banks use a major portion of deposits to extend loans. They charge a higher
rate
of interest on loans than what they offer on deposits. The difference between
what is charged from borrowers and what is paid to the depositors is the main
source of income for the banks.
Question 2.
Why can one not refuse a payment made in rupees in India?
Answer:
One cannot refuse a payment made in rupees in India because it is authorised
by the government of India. It is accepted as a medium of exchange all over the
country.
Question 3.
Compare formal sector loans with informal sector loans regarding interest only.
Answer:
In formal sector, the rate of interest is low. It is fixed by the Reserve Bank
of India, who supervises the functioning of formal sources of loan.
In informal sector, the rate of interest is very high as there is no
organisation to supervise the functioning of informal sources of loan.
Question 4.
Why is the supervision of the functioning of formal sources of loans necessary?
Answer:
It is necessary to supervise the functioning of formal sources of loans because
the banks have to maintain a minimum cash balance out of the deposits they
receive. They should also provide loans to small cultivators, mall scale
industries etc.
Question 5.
Prove with an argument that there is a great need to expand formal sources of
credit in rural India.
Answer:
There is a great need to expand the formal sources of credit in rural India
because:
·
There is no organisation to supervise credit activities of the
informal sector. It could lead to increasing debt among the borrowers.
·
The rate of interest is very high in informal sector.
Question 6.
Why are most of the poor households deprived from the formal sector of loans?
Answer:
Most of the poor households are deprived from the formal sector of loans
because they do not have the collateral to keep with the banks.
Question 7.
How does money eliminate the need for double coincidence of wants?
Answer:
Money solves the problem of double coincidence of wants by acting as a medium
of exchange.
Short Answer Type Questions [3 Marks]
Question 8.
How can money be easily exchange for goods or services? Give an example to
explain.
Answer:
Transactions are made in money because a person holding money can easily exchange
it for any commodity or a service. It solves the problem of double coincidence
of wants by acting as a medium of exchange.
For example, a shoe manufacturer wants to sell shoes in the market and wants to
buy rice. Under barter system, both parties selling shoes and rice have to
agree to buy and sell each other’s commodities and this creates a problem which
is referred to as double coincidence of wants. This problem is overcome by the
introduction of money. Now, the shoe manufacturer will sell the shoes for money
and with that money he can buy rice.
Question 9.
“The credit activities of the informal sector should be discouraged.” Support
the statement with arguments.
Answer:
The credit activities of the informal sector should be discouraged because:
·
There is no organisation to supervise the credit activities of the lenders
in informal sector.
·
The informal sector lends at a very high rate of interest and use
unfair means to get the money back.
·
Higher cost of borrowing means a large part of the earnings of the
borrowers is used to repay the loan. Hence, the borrowers have less income left
for themselves.
·
Sometimes, due to higher rate of interest, the amount to be repaid becomes
higher than the income of the borrower due to that there is always a risk for
borrowers to fall in debt-trap.
Question 10.
“Cheap and affordable credit is crucial for the country’s development.” Assess
the statement.
Answer:
Cheap and affordable credit is crucial for a 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 leads to acceleration of
economic activity.
·
Cheap credit would also allow weaker sections of society to access formal
sector of lending and get rid of from informal moneylenders.
·
Affordable credit would also end the cycle of debt trap.
·
Cheap and easy terms of credit would inspire better investment in
technology and thus increase competition.
Question 11.
“Deposits with the banks are beneficial to the depositors as well as to the
nation.”
Examine the statement
Answer:
Deposits with the banks are beneficial to the depositors as well as to the
nation in various ways. Some of them are:
·
They provide safe and secure deposits to a person’s money.
·
They provide excellent saving and investment options and also help in
the growth of the nation.
·
They provide interests on the deposited money to the depositors.
·
Money can be easily withdrawn from the banks as and when required by
the depositors.
·
They provide easy loans on nominal rates that make it possible for the
common man to build their own assets.
Question 12.
‘Credit has its own unique role for development.’ Justify the statement with
arguments.
Answer:
Credit has a unique role in the economic development of the country. It is
needed by all the three sectors of the economy.
·
In urban sector, big businessmen and small manufacturers need loans
either to expand their enterprises, bring new technology or diversifying their
businesses.
·
In rural sector, the main demand for credit is for crop production.
Crop production involves cost of seeds, fertilizers, pesticides, water,
electricity, repair of equipment’s. Cheap credit would thus lead to increase in
production.
·
Even tertiary sector needs loans to buy the latest equipment’s and
technology. Thus, we can say that credit has a unique role in the development
of a country.
Question 13.
How is money transferred from one bank account to another bank account? Explain
with an example.
Answer:
For payment through cheque, the payer who has an account in the bank, draws out
a cheque for a specific amount. The cheque is a statement asking the bank to
pay a specific amount from the person’s account to the person in whose name the
cheque has been issued.
For example, Amman has to pay a specific amount of money to Shute, say ?
60,000. Amman will write a cheque in the name of Shorty. It means Amman
instructs his bank to pay the money to Shorty. Shorty will deposit the cheque
in her bank. After two or three days, the money will be transferred from Amman’s
account to Shorty’s account.
Question 14.
“Poor households still depend on informal sources of credit.” Support the
statement with examples.
Answer:
Poor households still depend on informal sources of credit because:
·
Bank loans require proper documentation and collateral which is rarely
available with poor households.
·
Informal sources of credit such as moneylenders know the borrowers
personally and are often willing to give a loan without a collateral.
·
Sometimes, if the borrowers are unable to return the loan, they can get
additional loans from moneylenders.
Long Answer Type Questions [5 Marks]
Question 15.
Describe the vital and positive role of credit with examples.
Answer:
Credit plays a vital and positive role in the following ways:
·
It helps people from all walks of life in setting up their business,
increase their income and provide support to their family needs.
·
It makes it possible for the people to own or construct their own
house and get relief from monthly rent.
·
People often avail themselves of credit to purchase luxury items like
vehicles, A.Cs, etc., which further raises their standard of living.
·
It enables us to invest in human resource. People take credit for
education, training, etc. which allows enrichment of human resource.
·
For example, Salem availed credit facility to meet the working capital
needs of production. It helped him to meet the on-going expenses of production,
complete production on time, thereby, increasing his income.
Question 16.
How can the formal sector loans be made beneficial for poor farmers and
workers? Suggest any five measures.
Answer:
The formal sector loans can be made beneficial to poor farmers and workers
in following ways:
·
The process of providing loans should be made easier and accessible to
them.
·
Large number of banks and cooperatives should be opened in the rural areas.
·
Banks and cooperatives should expand their facility of providing loans so
as to decrease dependence on informal sector.
·
Special focus should be paid on poor and small farmers along with
small scale industries.
·
Loan processing should be simple, faster and timely.
2015
Very Short Answer Type Questions [1 Mark]
Question 17.
What is the meaning of barter system?
Answer:
A system where goods are directly exchanged without the use of money is called barter
system.
Question 18.
hat is meant by double coincidence of wants?
Answer:
Double coincidence of wants means owner of good X, say shoes, to find someone
else with good Y, say wheat, and both being in need of each other’s good
Question 19.
How does money act as a medium of exchange?
Answer:
Money acts as an intermediary in the process of exchange, thus it is called a
medium of exchange.
Question 20.
What is a cheque?
Answer:
A cheque is a paper instructing the bank to pay a specific amount from a person’s
account to the person in whose name the cheque has been issued.
Question 21.
Who supervises the functioning of formal sources of loans?
Answer:
Reserve Bank of India
Question 22.
What are the two forms of modern currency?
Answer:
Paper notes and Coins
Short Answer Type Questions [3 Marks]
Question 23.
Why is it necessary for the banks and cooperative societies to increase their
lending facilities in rural areas? Explain.
Answer:
Banks and cooperatives should extend their lending activities in rural areas
because:
·
Rural poor and farmers have to borrow money from moneylenders at a very
high rate of interest. Therefore, the cost to the borrowing is very high.
·
A large part of the earnings of borrower is used to repay the loans. Hence,
they have less income.
·
Sometimes, a higher rate of lending means that the amount to be
repaid is more than the earnings of the borrower.
·
To save the people from the clutches and exploitation by the moneylenders,
it is necessary for the banks and co-operatives to extend their lending activities.
·
It would lead to higher incomes and improve the condition of the
rural poor.
·
People can also start a business or set up a small scale industry
Question 24.
Why is modern currency accepted as a medium of exchange without any use of its own?
Find out the reason.
Answer:
Modern money has been accepted as a medium of exchange because:
·
It is authorised by the government of a India.
·
It is issued by the apex bank on behalf of the government.
·
No other individual is allowed to issue currency.
·
The law of the country legalises its use as a medium of payment and
setting transactions.
·
No one in a country can refuse payment made in the currency of that
country.
Question 25.
“Money has made transactions easy.” Justify.
Answer:
Money has made transactions easy because:
·
It can be easily exchanged with any commodity or service.
·
It solves the problem of double coincidence of wants.
·
It is the perfect store of value.
·
It makes economic activities quite independent from each other.
Long Answer Type Questions [5 Marks]
Question 26.
How are deposits with the banks beneficial for individual as well as for the
nation? Explain with examples.
Answer:
Deposits with the banks are beneficial to the depositors as well as to the
nation in various ways. Some of them are:
·
They provide safe and secure deposits to a person’s money.
·
They provide excellent saving and investment options and also help in the
growth of the nation.
·
They provide interests on the deposited money to the depositors.
·
Money can be easily withdrawn from the banks as and when required by the
depositors.
·
hey provide easy loans on nominal rates that make it possible for the
common man to build their own assets.
Question 27.
What are Self-Help Groups? How do they work? Explain.
Answer:
Self-Help Groups are financial support groups that are formed at the village
level
particularly by women. These consist of around 15-20 members who meet and save
their money regularly.
The following points sum up the functioning of Self-Help Groups:
·
These groups help in pooling the savings of the members, especially who are
poor women.
·
All decisions regarding savings and loans are taken by the members of
the group.
·
These groups provide timely loans for a variety of purposes and at a
reasonable rate of interest to its members.
·
These groups help the borrowers to overcome the problem of lack of
collateral.
·
These groups provide a platform to discuss a variety of social issues of
rural people.
·
These groups are collectively responsible for the repayment of loan.
Question 28.
How do banks play an important role in the economy of India? Explain
Answer:
Banks play an important role in developing the economy of India by taking
the following steps:
·
Banks keep money of the people in safe custody to be used by the depositors
in future.
·
Banks also increase the savings of the depositors by paying interest
on the money deposited.
·
Banks mediate between people who have surplus and those who need money.
This is done through granting loans. People avail themselves of these loan
facilities to increase production and income.
·
Banks, being the formal source of credit, give loans at a very low
rate of interest at flexible terms and conditions.
·
Special provisions are made through banks for the upliftment of agriculture
and industry like waiving of loans of the farmers.
Question 29.
What is credit? How does credit play a vital and positive role? Explain with an
example.
Answer:
Credit refers to an agreement in which the lender supplies the borrower with
money, goods on services in return for the promise of future payment.
Credit plays a vital and positive role in the following ways:
·
It helps people from all walks of life in setting up their business,
increase their income and provide support to their family needs.
·
It makes it possible for the people to own or construct their own house and
get relief from monthly rent.
·
People often avail themselves of credit to purchase luxury items like
vehicles, A.Cs, etc., which further raises their standard of living.
·
It enables us to invest in human resource. People take credit for
education, training, etc. which allows enrichment of human resource.
·
For example, Salim availed credit facility to meet the working capital
needs of production. It helped him to meet the ongoing expenses of production,
complete production on time, thereby, increasing his income.
2014
Short Answer Type Questions [3 Marks]
Question 30.
How does money solves the problem of double coincidence of wants? Explain with
an example.
Answer:
In barter system, where goods are directly exchanged 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. But it, indeed, is a very
cumbersome process.
By serving as a medium of exchange, money removes the situation of double
coincidence of wants and the difficulties associated with the barter system.
For example, it is no longer necessary for a shoe manufacturer to* look for a
farmer who will buy his shoes and at the same time sell him wheat. AH he has to
do is to find a buyer for his shoes, who will exchange his money for shoes.
Now, he can purchase wheat or any other good in the market with the help of the
money earned. Thus, the problem of double coincidence of wants gets solved with
the use of money.
Question 31.
How is money used in everyday life? Explain with examples.
Answer:
In everyday life, money is used in following ways:
·
It is used as a medium of exchange and facilitates the buying and
selling of goods like car, house, food, clothes etc.
·
It is used as deposits with the banks or to keep it at home like fixed
deposits, bonds etc.
·
It is used for borrowing and lending like loan.
Question 32.
Explain with examples, how people are involved with the banks.
Answer:
People are involved with the banks in the following ways:
·
Depositors
·
Borrowers
·
The people with excess money deposit it in the banks for safety. In turn
they earn interest on the amount deposited.
At the same time, there are people who need money for various activities. They approach
the banks for credit. The bank charges interest from the borrowers.
Question 33.
Explain with an example how credit plays a vital and positive role for
development.
Answer:
Credit plays a vital and positive role in the following ways:
·
It helps people from all walks of life in setting up their business,
increase their income and provide support to their family needs.
·
It makes it possible for the people to own or construct their own house and
get relief from monthly rent.
·
People often avail themselves of credit to purchase luxury items like
vehicles, A.Cs, etc., which further raises their standard of living.
·
It enables us to invest in human resource. People take credit for
education, training, etc. which allows enrichment of human resource.
·
For example, Salim availed credit facility to meet the working
capital needs of production. It helped him to meet the ongoing expenses of
production, complete production on time, thereby, increasing his income.
Question 34.
Why do lenders ask for a collateral while lending? Give any three reasons.
Answer:
The lenders ask for a collateral before lending because:
·
It is an asset that the borrower owns and uses this as a guarantee to the
lender – until the loan is repaid.
·
Collateral with the lender acts as a proof that the borrower will
return the money.
·
By keeping a collateral with the lender, the borrower is bound to be
regular in paying the interest because the borrower does not want to lose the
collateral.
Long Answer Type Question [5 Marks]
Question 35.
Why is it necessary for banks and cooperatives to extend their lending
activities in rural areas? Explain.
Answer:
Banks and cooperatives should extend their lending activities in rural areas
because:
·
Rural poor and farmers have to borrow money from moneylenders at a very
high rate of interest. Therefore, the cost to the borrowing is very high.
·
A large part of the earnings of borrower is used to repay the loans. Hence,
they have less income.
·
Sometimes, a higher rate of lending means that the amount to be repaid is more
than the earnings of the borrower.
·
To save the people from the clutches and exploitation by the moneylenders,
it is necessary for the banks and co-operatives to extend their lending
activies.
·
It would lead to higher incomes and improve the condition of the rural
poor.
·
People can also start a business or set up a small scale industry
2013
Short Answer Type Questions [3 Marks]
Question 36.
How is money used as a medium of exchange? Explain with examples
Answer:
Money is used as a medium of exchange because it serves as a common medium
through which people can carry out buying and selling. Use of money makes
economic activities independent of each other. At the same time, it removes the
inconvenience caused by the barter system.
For example, a person wants to sell sugar and buy wheat. He has to look for a
person who wants sugar and has wheat to sell. In contrast, if in an economy,
where money is used, the person who wants to sell sugar only has to look for a
buyer for his sugar. The money which he will get can be used to purchase the
wheat or any other commodity in the market. Since, money is used in the
exchange process it is called a medium of exchange.
Question 37.
What are the modern forms of money? Why is rupee widely accepted as a medium of
exchange? Explain two reasons.
Answer:
Modern forms of money include paper notes and coins.
Rupee is widely accepted as a medium of exchange because:
·
It is authorised by the government of India.
·
The law legalises the use of rupee as a medium of payment and
settling the transactions. Thus, no one can refuse a payment made in rupees.
Question 38.
What is a collateral? Why do lenders ask for collateral while lending? Explain
Answer:
A collateral is an asset such as land, building, livestock, vehicle or deposits
with the banks that the borrower owns and uses this as a guarantee to the
lender until the loan is repaid.
The lenders ask for a collateral before lending because:
·
It is an asset that the borrower owns and uses this as a guarantee to
the lender – until the loan is repaid.
·
Collateral with the lender acts as a proof that the borrower will
return the money.
·
By keeping a collateral with the lender, the borrower is bound to be
regular in paying the interest because the borrower does not want to lose the
collateral.
Question 39.
‘Cheap and affordable credit is essential for poor households both in rural and
urban areas.’ In the light of the above statement, explain the social and
economic values attached to it.
Answer:
The social value attached to cheap and affordable credit is that it helps in
reducing the dependence of poor on informal sources of credit. The economic
value attached to cheap and affordable credit is that it helps the poor in
rural and urban households to start self-employment ventures. This helps in increasing
their income earning capacity and standard of living.
Question 40.
What are demand deposits? How is money safe in the banks? Explain.
Answer:
Deposits in the bank account which are payable on demand are called demand
deposits.
Banks accept deposits from number of people. Some part of that money is given
out as loan and the other part is kept with the banks for making payments. So,
the money is safe with the banks. The depositors can withdraw their money
whenever they want.
Long Answer Type Questions [5 Marks]
Question 41.
What are the two categories of sources of credit? Mention four features of
each.
Answer:
The two categories of sources of credit are:
·
Formal sources of credit
·
Informal sources of credit
The features of formal sources of credit are:
·
They charge low rate of interest and the mode of repayment is easy.
·
They keep a collateral from the borrowers for granting loans.
·
Reserve Bank of India supervises the functioning of formal sources of
credit, (id) Urban households are largely depend on formal sources of credit.
·
They include banks and cooperatives.
The features of informal sources of credit are:
·
They charge higher rate of interest and the mode of repayment is very
harsh.
·
There is no need to keep a collateral in informal sources of credit.
·
There is no organisation to supervise the functioning of informal
sources of credit.
·
Poor households are largely depend on informal sources of credit.
·
They include moneylenders, relatives, friends etc.
Question 42.
What are Self-Help Groups? How are they emerging as an important source of
credit? Explain.
Answer:
Self-Help Groups are a group of 15 to 20 poor villagers, especially women, who
regularly pool money at regular intervals. When a member of the group is in
need of money, he/she can get the loan from the group at a low rate of
interest.
Self-Help Groups are emerging as an important source of credit because:
·
They charge less interest on the loans than what the moneylenders charge.
·
All decisions regarding savings and loans are taken by the members of the
group.
·
The members can take loans from the groups to meet their daily needs.
·
If the group is regular in its savings, they can also take loan from the
bank. Loan is sanctioned in the name of the group. The group is responsible for
the repayment of loan.
·
They help borrowers to overcome the problem of collateral.
·
They have freed borrowers from the clutches of the moneylenders.
2012
Short Answer Type Questions [3 Marks]
Question 43.
What is money? Why is modern money currency accepted as a medium of
exchange?
Answer:
Money is anything which has common acceptability as a means of exchange, a
measure and a store of value.
Modern money has been accepted as a medium of exchange because:
·
It is authorised by the government of a India.
·
It is issued by the apex bank on behalf of the government.
·
No other individual is allowed to issue currency.
·
The law of the country legalises its use as a medium of payment and
setting transactions.
·
No one in a country can refuse payment made in the currency of that
country.
Question 44.
Why is cheap and affordable credit important for the country’s development?
Explain any three reasons.
Answer:
Cheap and affordable credit is crucial for a 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 leads to acceleration
of economic activity.
·
Cheap credit would also allow weaker sections of society to access formal
sector of lending and get rid of from informal moneylenders.
·
Affordable credit would also end the cycle of debt trap.
·
Cheap and easy terms of credit would inspire better investment in
technology and thus increase competition.
Question 45.
“Whether credit will be useful or not, depends upon the situation.” Give two
different examples in support of this statement
Answer:
The two examples showing whether credit will be useful or not, depends upon
the situation are:
·
Chirac is a
shoe manufacturer. During the festival season, he receives an order for 3,000
pair of shoes to be completed in a month. He employs two more workers for
pasting and stitching. He takes an advance payment from a large trader for
1,000 pair of shoes. He asks the leather supplier to supply leather and payment
would be made later. Chirac completes the order in a month, makes a good profit
and repay all the money that he had borrowed.
·
Sana, a
small farmer, grows groundnut in her three acres of land. She took a loan from
the moneylender, hoping to repay the loan, once the crop is harvested. Being
hit by the pest, the crop fails. Expensive pesticides did not make any
difference. Sana is unable to repay the moneylender and the other year, it
becomes a bigger amount. Next year again, she took a loan for cultivation. It
is not a bomber crop this year too. Sana earns little, but it is not enough to
repay the old loans. She had to sell a part of the land to repay the loan. She
is caught in a debt. This situation is called debt-trap.
·
Hence, we can say that it depends on situation whether credit will be
useful or not.
Question 46.
“Most of the poor households still depend on the informal sector for loans,
both in rural and urban areas of India.” Support the statement with three
examples.
Answer:
Poor households still depend on informal sources of credit because:
·
Bank loans require proper documentation and collateral which is rarely
available with poor households.
·
Informal sources of credit such as moneylenders know the borrowers
personally and are often willing to give a loan without a collateral.
·
Sometimes, if the borrowers are unable to return the loan, they can get
additional loans from moneylenders.
Question 47.
How do SHGs help borrowers to overcome the problem of lack of collateral?
Explain with an example.
Answer:
SHGs help borrowers to overcome the problem of lack of collateral in the
following ways:
·
It is the group that is responsible for the repayment of loan.
·
Any case of non-payment of loan by any member is followed up
seriously by other members.
·
The formal sector is willing to lend to the members of SHGs because
of their good track record of managing the credit.
Question 48.
Why is there a great need to expand formal sector of credit in India? Explain
any three reasons.
Answer:
There is a great need to expand formal sector of credit in India because:
·
There is no organisation to supervise the credit activities of
lenders in informal sector.
·
The rate of interest charged by the informal sector is very high as
compared to formal sector.
·
People who might wish to start a business by borrowing may not do so
because of high cost of borrowing in informal sector.
·
The higher interest rate of borrowing can mean that the amount to be
repaid is greater than the income of the borrower in informal sector.
Long Answer Type Question [4/5 Marks]
Question 49.
Which government body supervises the functioning of formal sources of loans in
India? Explain its functioning.
Answer:
Reserve Bank of India supervises the functioning of formal sources of loans
in India.
·
It issues currency notes on behalf of the central government.
·
It issues guidelines for fixing rate of interest on deposits and lending by
banks. ,,
·
It ensures that banks should maintain a minimum cash balance out of
the deposits they receive.
·
It ensures that the banks should give loans not only to profit making
businesses but also to poor people and small traders.
·
Periodically, the banks have to submit a report to the RBI on how
much they are lending, to whom and at what interest rate.
2011
Long Answer Type Questions [4/5 Marks]
Question 50.
Describe any four advantages of Self-Help Groups for the poor.
Answer:
The advantages of Self-Help Groups for the poor are:
·
They help the poor to become self-reliant in terms of savings and
generating income as the decisions regarding savings are taken by the group
members.
·
They avail the facilities of loans from formal sources like banks at
low rate of interest.
·
They create self-employment opportunities by discussion within their group.
·
They make it possible for the poor to avail timely finance without any
collateral.
Question 51.
Explain any four terms of credit with examples.
Answer:
The four terms of credit are:
·
Interest rate. The borrower has to pay a sum of money as interest along with the
principal amount.
·
Collateral. It is an asset that the borrower owns and uses this as a guarantee –
to the lender until the loan is repaid.
·
Documentation. Proper documents of borrowing with all the terms and conditions must
be submitted.
·
Mode of repayment. The mode through which the borrower will repay the loan must be clearly
mentioned. Long-term loans can be repaid in annual, half yearly or monthly
instalments.
Question 52.
Explain two points of differences between formal and informal sources of
credit.
Answer:
2010
Very Short Answer Type Questions [1 Mark]
Question 53.
What is collateral?
Answer:
Collateral is an asset that the borrower owns such as land, building, vehicle,
livestock, deposits with the banks and uses these as a guarantee to the lender
until the loan is repaid.
Question 54.
Define credit.
Answer:
Credit refers to an agreement in which the lender supplies the borrower with
money, goods or services in return for the promise of future payments with
interest.
Question 55.
Which are the two major sources of formal loan for rural households?
Answer:
Banks and Cooperatives
Question 56.
Mention any three points of distinction between formal sector loans and informal
sector loans.
Answer:
long Answer Type
Questions [4/5 Marks]
Question 57.
How does the use of money make exchange of things easier? Explain with
examples.
Answer:
Money is used as a medium of exchange because it serves as a common medium
through which people can carry out buying and selling. Use of money makes
economic activities independent of each other. At the same time, it removes the
inconvenience caused by the barter system.
For example, a person wants to sell sugar and buy wheat. He has to look for a
person who wants sugar and has wheat to sell. In contrast, if in an economy,
where money is used, the person who wants to sell sugar only has to look for a
buyer for his sugar. The money which he will get can be used to purchase the
wheat or any other commodity in the market. Since, money is used in the
exchange process it is called a medium of exchange.
Let us take an example of a farmer who wants to sell wheat and wants to buy
goat in lieu of that. If he opts for barter system, he will have to search a
person who may be interested in giving off his goat and in taking wheat. But
finding such a person can be difficult and time-consuming. On the other hand,
if the farmer sells wheat and takes money for that, he can easily go and
purchase goat with that money.
Question 58.
Why are the deposits in the banks called ‘demand deposits’? What are the benefits
of deposits with the banks?
Answer:
People deposit the surplus or extra money in the banks. The banks keep the
money safe and provide interest on it. 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 with the banks are:
·
They can be encashed by issuing cheques in the name of the person to whom
the payment is to be made.
·
They make it possible to directly settle payments without the use of cash.
·
Since demand drafts/cheques are widely accepted as a means of payment along
with currency, they constitute money in the modern economy.
Question 59.
How does credit plays a vital and positive role?
Explain with suitable example.
Answer:
Credit plays a vital and positive role in the following ways:
·
It helps people from all walks of life in setting up their business,
increase their income and provide support to their family needs.
·
It makes it possible for the people to own or construct their own
house and get relief from monthly rent.
·
People often avail themselves of credit to purchase luxury items like
vehicles, A.Cs, etc., which further raises their standard of living.
·
It enables us to invest in human resource. People take credit for
education, training, etc. which allows enrichment of human resource.
·
For example, Salim availed credit facility to meet the working
capital needs of production. It helped him to meet the ongoing expenses of
production, complete production on time, thereby, increasing his income.
Question 60.
When does credit push the borrower into a
debt-trap? Explain with the help of an example.
Answer:
In situation with high risks, credit might create problems and pushes the
borrower into a debt-trap. He is much worse off than before. For example, crop
production involves high costs on inputs such as fertilizers, pesticides, water
etc. Farmers generally take loans at the beginning of the season and repay the
loan after harvest. But the failure of the crop makes loan repayment
impossible. They have to sell part of the land to repay the loan or a fresh
loan may be required to repay the previous loan, and the borrower may find
himself caught in a vicious circle and recovery from such a situation is very
painful.
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