Money and Credit PDF

Chapter 3 Money and Credit Points to Remember:  When goods are directly exchanged for goods and there is no use of money, it is called Barter System.  Money is someting that can act as a medium of exchange in transction. It elimates the need for double co...

Chapter 3 Money and Credit Points to Remember:  When goods are directly exchanged for goods and there is no use of money, it is called Barter System.  Money is someting that can act as a medium of exchange in transction. It elimates the need for double conicidence of wants.  When both parties have to agree to sell and buy each other's commodities. This is know as the double coincidence of wants. X–Social Science (334) Functions of reserve bank Issue the currency Monitor the work culture of banks and SHG Provide Direction Regarding terms and Interest Provide Feedback Regarding Monetary Policies of India Hold a part of the cash reserve of the banks Credit refern to an agreement in which the lender supplies the borrower money, good and services in return for the promise of future repayment. Credit as an asset: During the festival season, a shoe manufacture Salim has re- ceived an other of making shoes in bulk, within one month's time. To complete this production, he hires extra workers and has to purchase the raw materials. He asks the supplier to supply leather now and promise to pay him later. Then he takes some advance paryment from trader. By the end, of the month, he is able to deliver the order, make a good profit and repay the money he had borrowed. Credit as a debt trap: A farmer Swapna takes lona from a money lender to meet the expenses of cultivation. But unfortunately the crop was hit by the pests and there was crop failure. So, she is unable to repay the loan and debt grows larger with Interest. Collateral is asset that the borrower owns (such as land, building vehicle, livestock) ad uses this as a gurantee to a lender until the loan is repaid. (335) X–Social Science  Self Help Groups: It's basic idea is to provide financial resources for the poor thorugh organizing the rula poor especially women into self Help Groups. organizing the rural poors, especially women Providing platfrom collection of to discuss various savings from social issues Works members. of SHG’s Provide loan providing loans at reasonable without interest rate collateral X–Social Science (336) Questions: 1. Which of the following can be considered as modern form of money? (a) Paper note (b) Gold coins (c) Silver coins (d) Copper coins 2. In India, which agency is authorized to issue the notes and cur- rency? (a) NABARD (b) Reserve Bank of India (c) World Bank (d) State Bank of India 3. Where are the large part of deposits spend by the bank? (a) For opening new branches (b) To pay taxes (c) To pay interest on loan (d) To provide loan 4. Which of the following is not included in the formal source of loan? (337) X–Social Science  (a) Bank (b) Co-operative Banks (c) Employer (d) None of the above 5. Which of the following is not included in the formal source of loan? (a) Unable to repay the loan (b) Able to repay the loan (c) Both are correct (d) Both are wrong 6. Which of the following is not an example of collateral? (a) Jewelry (b) House (c) Agricultural Land (d) None of the above 7. Who takes the major decision regarding savings and loans in SHG's? (a) Bank (b) Government (c) Members (d) NGOs X–Social Science (338)  8. How much cash do the bank have with its total cash amount? (a) 10% (b) 20% (c) 15% (d) 30% 9. Which Currency is used as medium of exchange mostly at Inter- national Level? (a) American Dollar (b) Singaporean Dollar (c) Rupees (d) Taka 10. Who is responsible for the establisment of Grameen Bank in Bangladesh? (a) Wasim Akram (b) Shoaib (c) Muhammad Yunus (d) Shahid Afridi 11. Suppose you are living in ancient times, when money is not ac- cepted as medium of transaction. What kind of proble you wll find while purchansing and selling the things? (339) X–Social Science 12. What was the primitive methods of exchange in early ages in India? 13. Bharti has a doubt that why one cannot refuse a payment made in rupees in India? 14. Which government agency is authorized to issue notes and cur- rency in India. 15. Why a loan from informal Sector is costlier than the formal sec- tor? 16. Give one example each of modern currency and older currency. Answer 1. Paper note 2. Reserve Bank of India 3. To give loans 4. Employer 5. To unable to repay loan 6. All are wrong 7. Members 8. 15% 9. American dollar X–Social Science (340) 10. Muhammad Yunus 11. Doubles coincidence of wants 12. Grains and Cattles 13. It is authorized by Government of India 14. Reserve Bank of India 15. Interest Rate is higher. 16. Modern currency-Notes, coins etc. Older currency-Gold coins etc. Long Answer Questions: 1. Analyse the work of Reserve Bank of India? 2. How do formal and informal sources of credit differ from each other? 3. What is credit? How can credit be both an asset as well as a debt trap? 4. What are the terms of credit? How it may vary for person to person? 5. How is the concept of Self Help Group important for poor people? Give your view points. 6. The credit activities of the informal sector should be discour- aged. Support your statement with relevant arguments. 7. Why the formal sector or informal sector asks for collateral? 8. How do farmers gets into debts trap? (341) X–Social Science  9. Review any three merits and any two demerits of ‘formal sector of credits’ in India. 10. Why the banks may not be willing to land to certain borrowers? Give reasons. Answers 1. Issue the currency on behalf of Government of India. Issues guidelines regarding working culture of Bank and SHG. Give directions regarding terms and interest on credits. To provide feedback regarding monetary policies to govern- ment of India. RBI holds a part of the cash reserve of the bank. 2. Formal sector Informal sector Rate of Interest is lower. Higher rate of Interest. Collateral is must for Ready to give loans without getting loan. any collateral too. RBI supervises them. No organization to supervise them. More documentation is Less documentation, less required. It involves many formalities. formalities. Ex.: Banks and co-operatives. Examples: Moneylender, traders, friends, retailers and so on. X–Social Science (342) 3. Credits refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payment. Credit as an asset: During the festival season, a shoe manu- facturer Salim has received an order of making shoes in bulk, within a month’s time. To complete production, he hired extra workers and has to purchase the raw materials. He asks the supplier to supply leather now and, promise to pay him later. Then he took some advance payment from the trader. By the end, of the month, he is able to deliver the order, make a good profit and repay the money he had borrowed. Credit as debt trap: A farmer Swapna takes from a money- lender to meet the expenses of cultivation. But unfortunately the crop is hit by the pests and fails. So, she is unable to repay the loan and debt grows larger with interest. In Salim’s case credit plays a vital and positive role, whereas in Swapna’s case credit pushes the borrowers into a situation from which recovery is painful. 4. Collateral Every loan agreement specifies an interest rate which the bor- rower must pay to the lender along with repayment of the princi- pal. In addition, lender may demand collateral, i.e., as assert that the borrower owns and uses this as a guarantee until the loan is repaid. (343) X–Social Science  If the borrower fails to repay the loan, the lender has the right to sell the collateral to obtain payment. Terms of credit comprise interest rate, collateral and documenta- tion requirement, and the mode of repayment. 5. SHG’s basic idea is to provide financial resource for the poor through organizing the rural poor especially women, into small -Help Groups. It organizes the rural poor, especially women, into small Self Help It collects saving of the members. It provides loans without collateral. It provides timely loans at reasonable rate of interest. It also provides a platform to discuss various social issue. 6. Informal lenders charge very high interest on their loans. There are no boundaries and restrictions. In certain cases, the high interest rate for borrowing can mean that the amount to be repaid is greater than the income of the borrowers. This could lead to increasing debt trap, therefore the credit activities of the informal sector should be discouraged. X–Social Science (344)  7. Lenders may demand collateral or an asset that the borrower owns to use it as a guarantee until he repays the loan. It may be sold if the borrower is not able repaid. 8. Failure of the crop makes loan repayment impossible. Downfall of crop prices also makes loan repayment impossible. Higher interest makes life difficult. Credit in such a condition pushes the borrowers into a situation from which recovery is painful and they get into the debt trap. 9. Merits Helps to meet the working capital needs of production. Helps in completing production on time. Low interest rate. Helps in increasing earnings. Demerits Difficulty in obtaining loans. Collateral issues. Documentation could be a problematic issue for few. 10. Banks require proper and legal documentations and collateral (345) X–Social Science  as security against loans. The borrowers who have not repaid previous loans, the banks might not be willing to lend them fur- ther. Those entrepreneurs, who are going to invest in a business with high risks banks might not be willing to lend money to them. Practice Questions 1. Why is it necessary to increase a large number of banks mainly in rural areas? Explain. 2. Explain any three reasons for the banks and cooperative societ- ies to increase their lending facilities in rural areas. 3. Describe the importance of formal sources of credit in the eco- nomic development? 4. Describe the bad effects of informal sources of credit on borrow- ers. 5. Why is it that most of people in Indian still dependent on informal sector of credit for loan? Source Based Questions 1. The reserve bank of india monitors the functions of formal sources of credit. The RBI monitors the banks in actually maintaining the required 15% of the cash balance. It ensures that the banks give loans not just to profit-making business and trader but also to small cultivatorn, small scale industries to small borrowers etc. X–Social Science (346)  banks have to submit information to the RBI on their credit activi- ties like how much they are landing, to whom, at what interest rates, etc. (i) Name the organization which monitors the functioning of formal sources of credit. (ii) Who ensures that the banks give loans not just to profit- making businesses and traders. Ans. (i) Reserve bank of india (ii) Reserve bank of india 2. Credit is one of the major aspects that determine a countrys development. There is a huge demand for loans for various ac- tivities cheap and affordable loans give people an opportunity to develop their business. Credit plays a very crucial role in agricul- tural activities people can barrow money and use it to adopt mod- ern farming methods to increase the crop production and grow crops which are more reliable than the traditional methods. By sanctioning loan to developing industries and trade, banks pro- vide them with the necessary aid for improvement. (i) By sanctioning loans to developing industries and trades.............. provide them with necessary aid for improvement. (ii) What is credit? (iii) Define role of credit in the development. Ans. (i) Banks (347) X–Social Science  (ii) Credit: The activity of borrowing and landing money be- tween two parties. (iii) Credit is one of the major aspects that determine a countrys development. X–Social Science (348)