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Question 1: In situations with high risks, credit might create further problems for the borrower. Explain?
Answer: Whether a credit would be useful or not, will depend on a number of factors like – risks involved, whether there is some support against a loss, terms of credit etc. It is a fact that in situations with high risks, credit might create further problems for the borrower. For example, credit taken by farmers for cultivation might create problems for the farmer at some times. Crop production involves high costs on inputs such as HYV seeds, fertilizers, pesticides, irrigation 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. Then in order to repay the loan sometimes, they become bound to sell part of their land. So, their situations become worse than before. The incidences of farmers’ suicides especially in Maharashtra are the burning examples of this situation.
Thus, whether a credit would be useful or not, depends on the various risks involved in the situation.

Question 2: How does money solve the problem of double coincidence of wants? Explain with example of your own.
Answer: In a barter system where goods are directly exchanged without the use of money, double coincidence of wants is an essential feature. By serving as a medium of exchanges, money removes the need for double coincidence of wants and the difficulties associated with the barter system. For example, it is no longer necessary for the farmer to look for a book publisher who will buy his cereals at the same time sell him books. All he has to do is find a buyer for his cereals. If he has exchanged his cereals for money, he can purchase any goods or service which he needs. This is because money acts as a medium of exchange.

Question 3: How do banks mediate between those who have surplus money and those who need money?
Answer: We know that banks accept the deposits from the people who have surplus money and also pay an interest on the deposits.
But banks keep only a small portion (15 per cent in India) of their deposits as cash with themselves. This is kept as provision to pay the depositors who might come to withdraw money from their accounts in the bank on any day. They use the major portion of the deposits to extend loans to those who need money. 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?
“Reserve Bank of India” and “Guaranteed by the Government” are written on top.
Answer: In India, Reserve Bank of India issues currency notes on behalf of the central government. The statement means that the currency is authorized or guaranteed by the Central Government. That is, Indian law legalizes the use of rupee as a medium of payment that can not be refused in setting transaction in India.

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 for many reasons:
1. Compared to formal lenders, most of the informal lenders charge much higher interest rates on loans like 3% to 5% per month i.e. 36% a year.
2. Besides the high interest rate, informal lenders impose various other tough conditions. For example, they make the farmers promise to sell the crop to him at a low price. There is no such condition in formal sector.
3. Informal lenders do not treat well with the borrowers. On the other hand, there is no such situation no such situation in the formal sector.
4. The Reserve Bank of India supervises the functioning of formal sources of loans. In contrast, there no organization which supervises the credit activities of lenders in the informal sector.
5. Loans taken by poor people from informal lenders sometimes, lead them to debt-trap because of high interest rate.
6. The formal sources of credit in India still meets only about half of the total credit needs of the rural people.
So, it is necessary that the formal sources of credit expand their lending especially in rural areas, so that the dependence on informal sources of credit reduces as this will also help in the development of the country.

Question 6: What is the basic idea behind the SHGs for the poor? Explain in your own words.
Answer: The basic behind the SHGs is to provide a financial resource for the poor through organizing the rural poor especially women, into small Self Help Groups. They also provide timely loans at a responsible interest rate without collateral.
Thus, the main objectives of the SHGs are:
1. To organize rural poor especially women into small Self Help Groups.
2. To collect savings of their members.
3. To provide loans without collateral.
4. To provide timely loans for a variety of purposes.
5. To provide loans at responsible rate of interest and easy terms.
6. Provide platform to discuss and act on a variety of social issues such education, health, nutrition, domestic violence etc.

Question 7: What are the reasons why the banks might not be willing to lend to certain borrowers?
Answer: The banks might not be willing to lend certain borrowers due to the following reasons:
(a) Banks require proper documents and collateral as security against loans. Some persons fail to meet these requirements.
(b) The borrowers who have not repaid previous loans, the banks might not be willing to lend them further.
(c) The banks might not be willing to lend those entrepreneurs who are going to invest in the business with high risks.
(d) One of the principle objectives of a bank is to earn more profits after meeting a number of expenses. For this purpose it has to adopt judicious loan and investment policies which ensure fair and stable return on the funds.

Question 8: In what ways does the Reserve Bank of India supervise the functioning of banks? Why is this necessary?
Answer: The Reserve Bank of India monitors the amount of money that banks loan out, and also the amount of cash balance maintained by them. It also ensures that banks give out loans not just to profiteering businesses but also to small cultivators, small scale industries and small borrowers. Periodically, banks are supposed to submit information to the RBI on the amounts lent, to whom and at what rates of interest.
This monitoring is necessary to ensure that equality is preserved in the financial sector, and that small industries are also given an outlet to grow. This is also done to make sure that banks do not loan out more money than they are supposed to, as this can lead to situations like the Great Depression of the 1930s in the USA, which greatly affected the world economy as well.

Question 9: Analyse the role of credit for development.
Answer: Credit plays a crucial role in a country’s development. By sanctioning loans to developing industries and trade, banks provide them with the necessary aid for improvement. This leads to increased production, employment and profits. However, caution must be exercised in the case of high risks so that losses do not occur. This advantage of loans also needs to be manipulated and kept under an administrative hold because loans from the informal sector include high interest rates that may be more harmful than good. For this reason, it is important that the formal sector gives out more loans so that borrowers are not duped by moneylenders, and can ultimately contribute to national development.

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:
(a) rate of interest
(b) requirements availability of collateral and documentation required by banker.
(c) mode of repayment.
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 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 unfavorable for the small farmer.
(d) Suggest some ways by which small farmers can get cheap credit.
Answer:
(a) Banks might not be willing to lend to small farmers because they don’t have collateral security to deposit in the bank. Some of these farmers are not in the
position of paying loan, due to already existing loan.
(b The other sources of borrowing are from moneylenders, employer, self-help group, landlord, etc.
(c) For example, if a person takes loan from his/her landlord on the basis of security of his/her land. At the end, be/she is not able to pay the loan then
landlord can sell ,land and get his money back.
(d) Small farmers can get cheap credit by the help of self-help group (SHGs) from bank and they can repay the loan easily after 3 or 4 years. The rate of interest
is also low as compared to other sources of credit.

Question 12: Fill 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.
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 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 a SHG most of the decisions regarding savings and loan activities are taken by
(a) Bank.
(b) Members.
(c) Non-government organisation.
(ii) Formal sources of credit does not include
(a) Banks.
(b) Cooperatives.
(c) Employers.
Answer:
(i) (b)
(ii) (c)

Multiple Choice Questions

1. Which one of the following statements is most appropriate regarding transaction made in money? [Delhi 2012]
(a) It is the easiest way
(b) It is the safest way
(c) It is the cheapest way
(d) It promotes trade

2. Which one of the following is the new way of providing loans to the rural poor? [Delhi 2012]
(a) Co-operative societies
(b) Traders
(c) Relatives and friends
(d) SHG’s

3. Which among the following authorities issues currency notes? [Delhi 2012]
(a) Government of India
(b) The State Bank of India
(c) Central Bank
(d) Reserve Bank of India

4. Banks provide a higher rate of interest on which one of the following accounts ? [AI 2012]
(a) Saving account
(b) Current account
(c) Fixed deposits for long period
(d) Fixed deposits for very short period

5. Which one of the following is the main source of credit for rich urban households in India ? [AI 2012]
(a) Formal sector
(b) Informal sector
(c) Money lenders
(d) Traders

6. Which one of the following is an essential feature of barter system?
(a) It promotes local market.
(b) It spreads social field of an individual.
(c) It requires double coincidence of wants.
(d) It is an easy way.

7. Which one of the following terms is not included against loans? [CBSE CCE 2012]
(a) Interest rate
(b) Collateral
(c) Documentation
(d) Lender’s land

8. What is main source of income for banks? [CBSE CCE 2012]
(a) Interest on loans
(b) Interest on deposits
(c) Difference between the interest charged on borrowers and depositors
(d) None of these

9. In which one of the following systems exchange of goods is done without use of money? [CBSE (CCE) 2012]
(a) Credit system
(b) Barter system
(c) Banking system
(d) Collateral system

10. Which of the following has an essential feature of double coincidence? [CBSE (CCE) 2012]
(a) Money system
(b) Barter system
(c) Financial system
(d) Banking system

11. What per cent of their deposits do bank hold as cash? [CBSE(CCE)2012]
(a) 50 percent
(b) 80 percent
(c) 15 percent
(d) 60 percent

12. Which of the following is an asset that the borrower owns and uses as a guarantee until the loan is repaid to the lender? [CBSE(CCE)2012]
(a) Property
(b) Money
(c) Collateral
(d) Deposits

13. How many members a typical Self-Help Group Should have? [CBSE (CCE) 2012]
(a) 14 – 19
(b) 15 – 20
(c) 20 – 25
(d) 25 – 30

14. In a barter system: [CBSE (CCE) 2012]
(a) Goods are exchanged for money.
(b) Goods are exchanged for foreign currency.
(c) Goods are exchanged without the use of money.
(d) Goods are exchanged on credit.

15. About what percentage of their deposits is kept as cash by the banks in India? [CBSE (CCE) 2012]
(a) 25 %
(b) 20 %
(c) 15 %
(d) 10 %

16. Why do banks keep a small proportion of the deposits as cash with themselves? [Delhi 2011]
(a) To extend loan to the poor.
(b) To extend loan facility.
(c) To pay salary to their staff.
(d) To pay the depositors who might come to withdraw money.

17. The currency notes on behalf of the Central Government are issued by whom? [Delhi 2011]
(a) State Bank of India
(b) Reserve Bank of India
(c) Punjab National Bank
(d) Central Bank of India

18. Which one of the following is not a feature of money? [AI 2011]
(a) Medium of exchange
(b) Lack of divisibility
(c) A store of value
(d) A unit of account

19. Professor Muhammad Yunus is the founder of which one of the following banks ? [AI 2011]
(a) Cooperative Bank
(b) Commercial Bank
(c) Grameen Bank
(d) Land Development Bank

20. Which one of the following is a modern form of currency ? [Foreign 2011]
(a) Gold
(b) Silver
(c) Copper
(d) Paper notes

21. The Informal source of credit does not include which one of the following? [Foreign 2011]
(a) Traders
(b) Friends
(c) Cooperative Societies
(d) Money – lenders

Additional Questions
22. Anything which is generally accepted by the people in exchange of goods and services
(a) Money
(b) Barter
(c) Credit
(d) Loans

23. Both parties agree to sell and buy each others commodities
(a) Measure of value
(b) Store of value
(c) Double coincidence of wants
(d) Credit

24. Money acts as an intermediate in the exchange process. Which function of money is highlighted here?
(a) Measure of value
(b) Medium of Exchange
(c) Store of value
(d) All of them

25. Modern forms of money include
(i) Gold
(ii) Paper Notes
(iii) Coins
(iv) Silver
(a) (i) and (iii)
(b) (ii) and (iv)
(c) (iii) and (iv)
(d) (ii) and (iii)

26. Mpney is accepted as a medium of exchange because the currency is authorised by
(a) Private sector
(b) Public sector
(c) Government
(d) People

27. Deposits in the bank accounts can be withdrawn on demand, therefore these deposits are called
(a) Returnable deposits
(b) Acceptable Deposits
(c) Demand deposits
(d) None of the above

28. It is a paper instructing the bank to pay a specific amount from the person’s account to the person in whose name it has been made is
(a) Paper note
(b) Cheque
(c) Chit fund
(d) Credit card

29. Banks use the major portion of the deposits to
(a) Keep as reserve so that people may withdraw
(b) Meet their routine expenses
(c) Extend loans
(d) Meet renovation of bank

30. An agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payment.
(a) Credit (loan)
(b) Chit fund
(c) Bank
(d) Cheque

31. Salim, the shoe manufacturer, to meet expenses obtains loans from two sources.
(i) Asks leather supplier to supply leather on credit
(ii) Bank
(iii) Obtains loan in cash as advance payment
(iv) Relatives
(a) (i) and (iii)
(b) (i) and (ii)
(c) (iii) and (iv)
(d) (ii) and (iii)

32. Swapna is unable to repay the money lender and she is caught in debt. She has to sell a part of the land to pay off the debt. This situation is an example of
(a) Debt-loss
(b) Debt-Insecurity
(c) Debt-trap
(d) All of them

33. Whether credit would be useful or not, depends on
(i) Whether there is some support in case of loss
(ii) Action of competitors
(iii) Market response
(iv) Risks in the situation
(a) (i) and (iii)
(b) (ii) and (iv)
(c) (ii) and (iii)
(d) (i) and (iv)

34. Terms of credit does not include
(a) Interest rate
(b) Collateral
(c) Cheque
(d) Mode of repayment

35. Krishak cooperative functioning in a village near Sonpur has ……………. farmers as members.
(a) 2500
(b) 2400
(c) 2350
(d) 2300

36. Formal sector loans include loans from
(i) Banks
(ii) Money lenders
(iii) Cooperatives
(iv) Traders
(a) (i) and (iii)
(b) (ii) and (iv)
(c) (ii) and (iii)
(d) (i) and (iv)

37. Contribution of commercial banks as a source of credit for rural households in India in 2003 was
(a) 30 %
(b) 28 %
(c) 25 %
(d) 26 %

38. Organisation which supervises the credit activities of lenders in the informal sector.
(a) No organisation
(b) Reserve Bank of India (RBI)
(c) State Government
(d) Central Government

39. Compared to the formal lenders, most of the informal lenders charge a much …………….. interest on loans
(a) Lower
(b) Constant
(c) Higher
(d) No interest

40. Formal sector meets only about …………… of the total credit needs of the rural people (in 2003)
(a) one third
(b) one fourth
(c) half
(d) whole

41. It is important that the formal credit is distributed more equally so that
(a) Poor can benefit from cheaper loans.
(b) Rich can get costly loans.
(c) Rich can get cheaper loans.
(d) None of the above.

42. After a year or two, if the SHG is regular in savings, it becomes eligible for availing loan from
(a) Cooperative societies
(b) Money lenders
(c) Bank
(d) Traders

43. ……………. help borrowers overcome the problem
of lack of collateral and also they are the building blocks of organisation of the rural poor.
(a) Government
(b) Banks
(c) Private sector
(d) SHGs

44. Almost all of the borrowers of Grameen Bank of Bangladesh are
(a) Men
(b) Women
(c) Senior citizens
(d) All of them

ANSWERS