Money and Credit in India
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Questions and Answers

Why is credit considered a crucial element in economic life?

  • It allows businesses to operate without any borrowed funds.
  • It facilitates development by providing resources to those in need. (correct)
  • It eliminates the need for a stable currency.
  • It helps individuals evade their financial obligations.

What is emphasized as a right of the people in relation to credit?

  • All credit transactions should be monitored by the government.
  • Affordable credit availability should be guaranteed for everyone, especially the poor. (correct)
  • Credit should only be available to wealthy individuals.
  • Credit must be accessed through complex documentation.

What innovative intervention is mentioned as a model for credit availability?

  • National Bank for Agriculture and Rural Development.
  • The Reserve Bank of India.
  • Microfinance institutions.
  • Grameen Bank. (correct)

How is money described in the context of economic transactions?

<p>It facilitates easy exchange for goods and services. (B)</p> Signup and view all the answers

What challenge do developing countries face concerning credit?

<p>Finding effective ways to provide credit to the poor. (C)</p> Signup and view all the answers

What is one common issue with credit arrangements highlighted in the content?

<p>They can often exclude the poorer sections of society. (D)</p> Signup and view all the answers

In what ways do people often use credit in economic situations?

<p>For buying goods, services, or promising payment later. (A)</p> Signup and view all the answers

What role do self-help groups play in relation to credit?

<p>They contribute to improving credit availability for marginalized groups. (C)</p> Signup and view all the answers

What does the term 'double coincidence of wants' refer to?

<p>Both parties wanting to exchange specific goods for each other (C)</p> Signup and view all the answers

How does the use of money benefit a shoe manufacturer in transactions?

<p>It reduces the need to find matching trade partners (A)</p> Signup and view all the answers

What was one of the earliest forms of money used in India?

<p>Grains and cattle (B)</p> Signup and view all the answers

What is a key characteristic of modern currency?

<p>It is authorized by the government (A)</p> Signup and view all the answers

Why might bartering be considered more difficult than using money?

<p>It necessitates finding specific trade matches (D)</p> Signup and view all the answers

What distinguishes modern forms of money from earlier objects like cattle or grains?

<p>Modern money is typically not usable in everyday contexts (A)</p> Signup and view all the answers

What is the role of the Reserve Bank of India regarding currency?

<p>It issues currency notes authorized by the government (D)</p> Signup and view all the answers

Which of the following is an advantage of using money over bartering?

<p>It provides a universal medium accepted in trade (A)</p> Signup and view all the answers

What would happen to Salim's bank account balance after he writes a cheque for Rs 20,000?

<p>It decreases by Rs 20,000 as he withdraws cash. (A)</p> Signup and view all the answers

Why do banks only keep a small percentage of deposits as cash?

<p>To allow for higher loan disbursements to borrowers. (B)</p> Signup and view all the answers

Which statement best describes the relationship between deposits and loans in a bank?

<p>Deposits are primarily used to fund loans for borrowers. (A)</p> Signup and view all the answers

What is the primary source of income for banks?

<p>The difference between interest charged on loans and interest paid on deposits. (B)</p> Signup and view all the answers

What is meant by 'demand deposits' in banking?

<p>Deposits that can be withdrawn at any time without penalty. (C)</p> Signup and view all the answers

What could occur if all depositors attempted to withdraw their money simultaneously?

<p>The bank could potentially run out of cash to provide withdrawals. (B)</p> Signup and view all the answers

What is the effect of interest rates on banks' loan and deposit transactions?

<p>Higher loan rates encourage borrowing and discourage depositing. (A)</p> Signup and view all the answers

How do banks typically manage the difference between deposits and the cash held?

<p>By lending out a large portion of the deposits while keeping a cash reserve. (B)</p> Signup and view all the answers

What strategy does Salim use to meet his production expenses?

<p>He obtains loans and advances from suppliers and traders. (D)</p> Signup and view all the answers

What is one negative consequence of credit for a borrower facing crop failure?

<p>Requirement to sell part of their land to repay the loan (C)</p> Signup and view all the answers

What was the primary reason for Swapna's inability to repay her loan?

<p>Her crop failed due to pest damage. (B)</p> Signup and view all the answers

What does collateral represent in a loan agreement?

<p>An asset pledged as security for the loan (C)</p> Signup and view all the answers

What outcome did credit have for Salim in his business operations?

<p>It helped him complete production and generate profit. (C)</p> Signup and view all the answers

What is indicated as a crucial factor for farmers in loan repayment?

<p>Income generated from farming after harvest. (C)</p> Signup and view all the answers

Which of the following is NOT a factor contributing to Swapna's risky financial situation?

<p>Support from family members (A)</p> Signup and view all the answers

What is the annual interest rate on Megha's housing loan?

<p>12 percent (C)</p> Signup and view all the answers

What ultimately happens to Swapna due to her debt situation?

<p>She sells part of her land to pay off the debt. (A)</p> Signup and view all the answers

What does Swapna's situation illustrate about credit in rural farming?

<p>It can sometimes lead to a debt trap. (C)</p> Signup and view all the answers

How often does Megha need to repay her loan installments?

<p>Monthly (C)</p> Signup and view all the answers

What is the total loan amount Megha took from the bank?

<p>Rs 5 lakhs (D)</p> Signup and view all the answers

Which of the following represents a key difference between Salim and Swapna's use of credit?

<p>Salim's credit resulted in profit while Swapna's did not. (C)</p> Signup and view all the answers

What can be inferred about the general need for credit among farmers?

<p>It is primarily required for crop production expenses. (B)</p> Signup and view all the answers

What does the term 'terms of credit' refer to?

<p>All conditions related to the loan including interest, collateral, and repayment (A)</p> Signup and view all the answers

Which scenario would most likely lead to a positive outcome from obtaining credit?

<p>Increased demand for a borrower's goods (D)</p> Signup and view all the answers

What is one major reason the poor struggle to obtain bank loans?

<p>Lack of proper documentation and collateral. (C)</p> Signup and view all the answers

What is a characteristic of informal lenders compared to banks?

<p>They often know the borrowers personally. (D)</p> Signup and view all the answers

What is the typical size range of a Self Help Group (SHG)?

<p>15-20 members (A)</p> Signup and view all the answers

How do Self Help Groups help their members access loans?

<p>They pool savings and offer low-interest loans to members. (C)</p> Signup and view all the answers

What happens if a member of an SHG fails to repay a loan?

<p>Other members follow up seriously for repayment. (D)</p> Signup and view all the answers

What are some uses of the loans provided to SHG members?

<p>To meet working capital needs and acquire assets. (A)</p> Signup and view all the answers

Why are banks willing to lend to women organized in SHGs?

<p>Groups have established a repayment track record. (A)</p> Signup and view all the answers

What is one disadvantage of borrowing from informal lenders?

<p>They do not keep records or charge higher interest rates. (A)</p> Signup and view all the answers

Flashcards

Credit Arrangement

An agreement where a borrower receives something of value (e.g., money, goods) and promises to repay the lender with interest.

Credit Accessibility

The availability of credit to everyone, especially those with limited financial resources.

Money as a Medium of Exchange

A system where individuals exchange goods and services for money, which can then be used to buy other things they need.

Credit Transactions

Transactions where payment is promised at a later date, often involving interest.

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Grameen Bank

A financial institution that provides loans and other financial services to the economically disadvantaged, particularly women.

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Monetary Transactions

The practice of using money to buy and sell goods and services.

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Formal and Informal Credit

The use of credit in both formal (banks, financial institutions) and informal (loans between individuals) contexts.

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Self-Help Group (SHG)

A group of individuals who come together to save money and provide loans to each other.

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Double Coincidence of Wants

A situation where two people want to trade goods, but don't have what the other wants. For example, a shoemaker wants wheat, but the farmer wants shoes, not wheat.

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Money

Anything that is widely accepted as payment for goods and services. It acts as a medium of exchange, making transactions easier.

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Medium of Exchange

The primary function of money, where it is used to buy and sell goods or services.

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Barter System

A system where goods and services are traded directly for other goods and services, without the use of money.

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Currency

The use of paper notes and coins as money, authorized by the government of a country.

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Fiat Money

A form of money that has no intrinsic value, unlike gold or silver. Its value is determined by the government that issues it.

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Reserve Bank of India (RBI)

The central bank of India responsible for issuing currency notes on behalf of the government.

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Commodity Money

The use of objects like grains and cattle as money, prevalent in ancient times.

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What is a cheque?

A written order instructing a bank to pay a specific amount of money from a person's account to another party.

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Why are demand deposits considered money?

Deposits are considered money because they are easily transferable and can be used to buy goods and services.

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How do banks manage deposits?

The practice of banks using a small portion of deposits as reserves to cover potential withdrawals and lending out the remaining portion for profit.

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What is credit?

A financial arrangement where a lender provides money, goods, or services to a borrower with the understanding that the borrower will repay the amount with interest at a later date.

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What is a bank loan?

An agreement where a bank lends money to an individual or organization for a specific purpose, charging interest on the loaned amount.

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How do banks make a profit?

Banks profit from the difference between the interest they charge on loans and the interest they pay to depositors.

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What role do banks play in the economy?

The practice of banks acting as intermediaries between depositors (who have excess funds) and borrowers (who need funds) to facilitate economic activity.

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What happens if all depositors withdraw their money at once?

A scenario where a bank faces a significant risk if all depositors simultaneously demand their money, as their reserves may not be sufficient to cover all withdrawals.

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Debt Trap

A situation where a borrower is unable to repay their debt due to unforeseen events, leading to further borrowing and potentially a cycle of increasing debt.

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Working Capital

Money borrowed for a short period of time for daily business operations, such as buying raw materials, paying wages, and fulfilling orders.

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Credit

The act of providing something of value with the promise of repayment later, often including interest.

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Informal Credit

Borrowing money from friends, family, or informal lenders, often without strict formal rules or regulations.

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Crop Production Cycle

The time delay between when farmers buy inputs like seeds and fertilizer and when they sell their produce.

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Crop Loan

The ability for farmers to access loans to meet the expenses of crop production.

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Farming Income

Income earned from crops after deducting all production expenses.

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Crop Production Costs

The amount of money needed to cover expenses related to planting, cultivating, and harvesting crops.

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Interest Rate

The extra amount of money that a borrower pays to the lender for using their money.

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Collateral

A valuable asset that a borrower pledges to a lender as security for a loan. If the borrower fails to repay, the lender can sell this asset to recover their money.

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Terms of Credit

The agreement between a borrower and lender outlining the terms of a loan, including the interest, repayment schedule, and collateral.

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Loan Agreement

A loan agreement that specifies a fixed amount of money to be repaid over a specific period, often with monthly installments.

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Credit Risk

The risk of a borrower's inability to repay a loan, often due to circumstances like crop failure or illness.

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Moneylending

The practice of lending money at very high interest rates, often exploiting borrowers who are desperate for cash.

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Bank

A financial institution that provides loans and other financial services to individuals and businesses.

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What are Self Help Groups (SHGs)?

Financial groups of 15-20 people, typically from the same neighborhood, who save money together and offer small loans to each other at lower interest rates than moneylenders.

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How do SHGs work with savings?

SHGs encourage regular saving by members, typically ranging from Rs 25 to Rs 100 or more per person.

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What kinds of loans do SHGs offer?

SHGs provide loans to members for various purposes, including buying essential goods, releasing mortgaged land, and acquiring assets like sewing machines.

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How do SHGs access bank loans?

SHGs are eligible for larger loans from banks after demonstrating consistent saving habits for 1-2 years.

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Who controls the loan decisions in SHGs?

SHGs typically decide on loan terms, including the amount, purpose, interest rate, and repayment schedule.

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What happens if a member defaults on an SHG loan?

SHGs are responsible for the repayment of loans to banks. Other members step in if one member fails to repay, ensuring a higher success rate.

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Why are banks willing to lend to SHGs?

Banks are more likely to lend to SHGs, even without collateral, because of the collective repayment responsibility of the group members.

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What are the benefits of SHGs for women?

SHGs empower rural women by providing financial access, fostering self-employment opportunities, and encouraging financial independence.

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Study Notes

Money and Credit

  • Money is a fascinating and complex subject, with a history of various forms.
  • Modern money is closely linked to the banking system.
  • The current Indian scenario shows growing digital transactions alongside cash use, influenced by computerization.
  • The stock of money includes currency held by the public and their demand deposits with banks.
  • The government ensures smooth functioning of the monetary system.
  • Demonetization, as seen in India, involves invalidating currency notes and replacing them with new ones.
  • Digital transactions have increased with the use of bank-to-bank transfers, mobile phones, ATMs, credit cards, and POS machines.
  • Credit is crucial in economic life, and it is important to understand the different aspects of credit arrangements, such as availability and terms.
  • Access to credit, especially for the poor, is a significant aspect of development.
  • The National Sample Survey Organisation and other sources provide data on formal and informal credit, including self-help groups (SHGs).
  • The use of money facilitates transactions. It simplifies exchanges because one doesn't need to find a person who simultaneously wants to buy and sell the same commodities.
  • Money's acceptance is rooted in its authorized status by the government, as seen with the Indian Rupee's legal tender status.
  • Modern forms of money include paper currency, notes and coins.
  • Money is accepted as a medium of exchange due to governmental authorization.
  • Various objectives in the modern forms, are that the currency is authorized by the government and people have a medium of exchange without problems.
  • People can make payments through deposits with banks. Banks usually hold a small portion of these deposits as cash, maintaining the rest as the provision to meet the demand.
  • Cheque payments transfer money between bank accounts without needing physical cash.
  • Loan activities in a bank involve accepting deposits, managing a small portion as cash, using most for lending purposes.
  • The difference between the interest charged from borrowers and what is paid to depositors is the bank's/ financial institution's profit.
  • Credit plays a significant role in meeting working capital needs, like managing expenses for production and facilitating timely deliveries.
  • Credit arrangements vary considerably, and understanding the terms, collateral (security) and interest are important considerations.
  • Rural areas frequently face difficulties in getting access to formal credit, often depending on informal lenders.
  • Self-help groups (SHGs) are a useful mechanism for providing credit to small borrowers, especially women, in the rural areas, which includes making decisions, taking part in savings and loan activities.
  • Credit is essential for development, particularly for small businesses and individuals, but it is essential to ensure reasonable and equitable terms to prevent potential problems.

Formal Vs Informal Sector Credit in India

  • Formal sector credit in India primarily comes from banks and cooperatives.
  • Informal sector credit involves moneylenders, relatives/friends, and other informal sources.
  • The Reserve Bank of India oversees formal sector institutions, supervising, ensuring they manage minimum cash deposits and reporting certain metrics.
  • Informal sector lenders often charge higher interest rates and lack the oversight and regulation of banks.
  • Informal lenders often know the borrowers personally and thus are more readily available, but they frequently charge higher interest rates.
  • Informal sector credit is generally less available to rural or poor people, and is also problematic since it is not transparent or easily accessible.

Different Credit Arrangements

  • Various credit arrangements exist for different purposes.
  • Terms like duration, interest rates, collateral, and repayment schedule vary between them.
  • Understanding these terms is crucial.
  • Credit arrangements may vary according to the nature of the borrower and the lender.

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Money and Credit Notes for Teachers - PDF

Description

Explore the multifaceted topics of money and credit, focusing on their evolution, particularly in the Indian context. Learn about the interplay between traditional financial systems and modern digital transactions, as well as the broader implications of credit availability and government interventions. This quiz covers key concepts essential for understanding economic development.

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