Money and Credit Quiz

Money and Credit

• Barter System: An early method of trade where goods and services are directly exchanged. It requires a "double coincidence of wants."

• Double Coincidence of Wants: Both parties in a barter transaction must want what the other party is offering.

• Money as a Medium of Exchange: Money is widely used as a standard for exchanging goods and services.

• Currency: A generally accepted form of money, including coins and paper notes. In India, the Reserve Bank of India (RBI) issues currency notes.

• Legal Tender: Rupees (₹) are legal tender in India, meaning they must be accepted as a medium of payment.

• Deposits with Banks: Money deposited in banks is safe and earns interest. Deposits can be withdrawn on demand, making them "demand deposits."

• Cheques: A written instruction to a bank to pay a specific amount from one account to another.

• Modern Banking System: Banks act as intermediaries between those with surplus funds (depositors) and those needing funds (borrowers). Banks charge higher interest rates on loans than they offer on deposits, profiting from the difference.

Credit (Loans)

• Credit (Loans): An agreement where a lender provides money, goods, or services in exchange for future payment.

• Debt Trap: A loan that is difficult or impossible to repay, often due to high-interest rates.

• Collateral: An asset owned by the borrower that secures a loan.

• Lender's Rights: If a borrower defaults on a loan, the lender can seize the collateral to recover the owed amount.

Credit Sources in India

• Formal Credit Sources: Banks and cooperatives, regulated by the Reserve Bank of India (RBI). They usually offer lower interest rates and follow rules and regulations.

• Informal Credit Sources: Moneylenders, traders, employers and relatives or friends. This sector usually doesn't operate under government oversight, charging higher interest rates and lacking regulatory requirements. Borrowers face greater risks of being trapped in debt.

Why prefer informal credit in rural areas?

• Limited Bank Branch Access: Banks may have limited branches in rural areas.

• Collateral Requirements: Poor individuals may lack the collateral necessary to obtain bank loans.

Self-Help Groups (SHGs)

• SHGs: Groups of 15-20 people who pool their savings. These groups often become eligible for loans after a period of consistent saving, which helps overcome the collateral requirement hurdle for loans.

Top 7 Questions (and answers)

• Q1. Define Cheque: A written instruction to a bank to pay a specific amount from one account to another.

• Q2. Compare and contrast the role of formal and informal sources of credit: Formal sources are regulated, offer lower interest rates and follow rules. Informal sources lack regulation, offer higher interest and run higher risks for borrowers..

• Q3. Reasons for increased rural lending: Formal institutions increase rural lending to reduce dependence on expensive informal lenders, boost agriculture through better resources, and encourage sustainable self-employment.

• Q4. Advantages of SHGs: SHGs allow poor people to pool savings for bank loans, making loans available with low interest rates and minimal collateral requirements.

• Q5. Benefits of Bank Deposits: Deposits are safeguarded by banks, and earn interest and contribute to the economy's overall growth.

• Q6. Functions of RBI: The Reserve Bank of India (RBI) supervises loans (formal sector), issues currency and sets interest rate policies.

• Q7. Acceptance of Currency: Currency is accepted by the government of the country and this acceptance is usually backed by law.