Class X Social Sciences Chapter 3 - Money and Credit PDF

Class X – Social Science (Economics) Chapter-3 Money and Credit (Notes) 1) Money is what the law says. It is anything will be called as money, if the law proclaims it money. Money is anything which is generally accepted as medium of exchange. 2) Barter exch...

Class X – Social Science (Economics) Chapter-3 Money and Credit (Notes) 1) Money is what the law says. It is anything will be called as money, if the law proclaims it money. Money is anything which is generally accepted as medium of exchange. 2) Barter exchange: Direct exchange of goods against goods without the use of money is called Barter exchange. The economy based on the barter exchange is known as Commodity for commodity economy or exchange economy. 3) What are the drawbacks of the barter system? i) Lack of double coincidence of wants : Simultaneous fulfillment of mutual wants by buyers and sellers is known as double coincidence of wants.The seller has to find a person who wants to buy his goods and at the same time who must have what the seller wants. For example: If a farmer wants to exchange rice for cloth, he must find a weaver who not only possesses cloth but is also willing to exchange cloth for rice. ii) Absence of common measure of value: In barter system each article must have as many different values as there are other articles for which it has to be exchanged. Absence of a common denominator in order to express ratios creates many difficulties. iii) Difficulty in storing wealth: It is difficult for the people to store wealth for future use in the form of goods like cattle, wheat etc. Holding of stocks of such goods involve cost for storage and leads to deterioration in quality. iv) Lack of standard for deferred payment: There is a lack of satisfactory unit to engage in future contracts. If the contracts which involve future payments are stated in terms of specific goods, there can be disagreements about quality of good, specific type of good etc. 4) What are the functions / role/ advantages of money? i) Money serves as a medium of exchange : a) The most important function of money is that it serves as a medium of exchange. Goods and services are bought and sold with the use of money. b) The use of money facilitates exchange; exchange promotes specialization, increases productivity and efficiency. Money provides freedom of choice to buy things that the consumer wants. c) The use of money eliminated the need for double coincidence of wants. It has made the system of exchange simple as people receive payments in money and then use the money to purchase goods and services. ii) Money as a measure of value :The second important function of money is a) It serves as a common measure of value. Money is the unit in which the values of goods and services are measured and expressed.  b) Different goods produced in the country are measured in different unit. Without a common unit of measure, exchange of goods and services would be difficult. c) When we express the value of a commodity in terms of money, it is known as price. Therefore without a common measure of value, pricing of commodities will not be possible. iii) Money acts as a store of value: People normally wish to keep a part of their wealth in the form of money. It is the most economic and convenient way of holding goods in the form of money. A store of value means that the purchasing power can be shifted from the present to the future. iv) Money acts as a standard for deferred payments: In the modern economic system, loans are generally given and taken and their repayments are generally postponed for a future date. Future payments cannot be made in terms of physical goods because the value of goods is liable to change. Money is therefore used as a standard for future payments. Modern form of money : 5) Paper notes and coins together are called currency. Discuss. i) Coins and paper notes are both token money. Token money is the money in which its face value [amount for which it will be exchanged] is greater than the intrinsic value [value of the material used in the currency]. ii) For e.g. A 100 rupee note has its face value of ₹ 100 which is higher than the value of the paper used. iii) Both coins and paper notes are fiat money. They serve as money by the order of the government / law. iv) Therefore currency is accepted as a medium of exchange not because it has any use of its own but because it is authorized by the government. v) Individuals are bound to accept currency in exchange for goods and services. It cannot be legally refused in settlement of payments of any kind by anyone. Therefore rupee is legally accepted as medium of exchange. 6) What are demand deposits? Describe any three features of these deposits. Deposits in the bank account which are payable on demand are called demand deposits. Savings on the current account serve the same purpose. The main features of these deposits are – i) People have provision to withdraw the money from these deposits whenever they require. ii) Banks give the facilities to the owner of demand deposits to avail the facilities of cheque for a required amount.  iii) If the deposits are in the form of saving accounts the banks pay interest on these deposits. iv) Safety of the money is ensured. 7) Why do demand deposits constitute as money in the modern economy? i) Deposit money refers to the deposits held with banks on the basis of which cheques can be drawn. ii) The banks provide the facilities of deposits and also pay an interest rate on the deposits. iii) People can withdraw their money on demand and therefore it is called as demand deposits. iv) Demand deposits share an essential feature of money. The facility of cheques against demand deposits makes it possible to directly settle payments without the use of cash. v) Since demand deposits are accepted widely as means of payment along with currency, they constitute money in the modern economy. 8) Explain the accepting deposits and lending functions of banks. OR How do banks mediate between those who have surplus money and those who are in need of money? OR There is a huge demand for loans for various economic activities. Banks make use of the deposits to meet the loan requirement of the people. In what ways the banks meet the loan requirement of the people? i) Banks mediate between those who have surplus funds [depositors] and those who are in need of these funds [ borrowers] ii) The public make deposits in banks. Banks keep only a small proportion of their deposits as cash with themselves. For e.g. In India, banks keep about 15% of their deposits as cash. This is kept as provision to pay the depositors who might come to withdraw money from the bank on any given day. iii) Since, on any particular day, only some of its many depositors come to withdraw cash, the bank is able to manage with this cash. iv) Banks use the major portion of the deposits to provide loans to the people. v) Banks charge a higher rate of interest on loans and pay less on the deposits. The difference of the interest rate charged from the borrowers and paid to the depositors is the main source of income the banks. 9) Explain the statement written on a note in India. On every note of denomination the following are written – “Reserve Bank of India” “Guaranteed by the Central Government”  “I promise to pay the bearer the sum of ____Rupees” and signed by the Governor of RBI. i) Currency in India is issued by the Reserve Bank of India which is the Central Bank of country, on behalf of Central Government. No other individual or organization can issue currency. ii) 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 cannot be refused in settling transactions in India. iii) As promise written on the promissory note, RBI (signed by RBI Governor) promises to bearer to pay the given sum of money. iv) Without this legal authority and the signature the note is only a piece of paper. 10) Define the following terms: i) Cheque- A cheque is a paper instructing the bank to pay a specific amount from the person’s account to the person in whose name the cheque has been issued. ii) Credit- Credit (loan) refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payment. iii) Collateral- Collateral is an asset that the borrowers owns (such as land, building, vehicles, livestock, deposits with banks) and uses this as a guarantee to a lender until the loan is repaid. iv) Terms of Credit- Interest rate, collateral and documentation requirement, and the mode of repayment together comprise what is called the terms of credit. They may vary depending on the nature of the lender and the borrower. 11) Distinguish between formal and informal sources of credit. Formal Informal i. The central bank [RBI] supervises the There is no organization that functioning of formal sources of credit. supervises the credit activities of the lenders in the informal sector. ii. The RBI monitors the banks and Informal lenders charge a high rate of directs the bank to give loans to small interest as per their wish. cultivators at low rates of interest. iii. Duration of the loan can be extended to Informal lenders can use unfair help the borrower and a clear mode of means to get their money back. They repayment is mentioned in the terms of maintain no records of repayments credit. made.  iv. Collateral is required to take a loan Informal lenders sometimes offer from the informal sources of credit loans without collateral but exploit the borrowers either through high rates of interest or by forcing them to work without payment. v. Since the rich households find it easy Since the poor households find it to arrange for collaterals the difficult to arrange for collaterals the formal sources of credit are more informal sources of credit are more common in the urban areas common in the rural areas. vi. Eg. Commercial banks, cooperatives, Eg. Money lenders, landlords, chit non-banking financial institutions like funds, self-help groups etc. mutual funds etc. 12) Explain giving an example of a situation where credit plays a positive role. i) Credit refers to an agreement in which the lender supplies the borrower with money goods or services in return for the promise of future payment. ii) People take credit for various reasons like cost of seeds, fertilizers, pesticides, water, electricity, repair of equipment etc. iii) For example a small farmer would obtain credit to meet capital needs of production. iv) This credit would help him to meet the ongoing expenses of production on time and thereby increase his earnings. v) Thus if the person taking a loan is benefitted from the increased earnings, credit plays a positive role in this situation. Repayment of the loan is crucially dependent on the income of the borrowers. 13) Illustrate giving an example how credit can play a negative role for the borrower. i) Credit refers to an agreement in which the lender supplies the borrower with money goods or services in return for the promise of future payment. ii) People take credit for various reasons like cost of seeds, fertilizers, pesticides, water, electricity, repair of equipment etc. For example, Ram, a small farmer would obtain credit to meet capital needs of production. iii) However the impact of credit would depend on risk in the situation for the repayment of the loan which in turn depends on the income of the borrower. iv) In case of a crop failure repayment of loan would be impossible and the borrower might have to sell a part of his assets to repay the loan. v) Thus credit instead of helping him to increase his earnings would make him worse off and push him into a situation of debt trap from which recovery his very painful. 14) Why do lenders ask for collaterals while lending? i) Collateral is an asset that the borrower owns uses this as a guarantee to a lender until the loan is repaid. ii) Some common examples of collaterals used for borrowing are land, building, vehicle, live stocks and deposits with banks etc. iii) Reasons for asking collateral: It ensures repayment. iv) This is because, if the borrower fails to repay the loan, the lender has the legal rights to sell the asset or the collateral to obtain repayment. v) Thus it prevent loss to the lender. 15) Discuss the supervisory role of the RBI as the apex bank in India. OR What is the role of RBI as a supervisory authority for the formal sources of credit? i) The Reserve Bank of India (RBI) functions as a supervisory authority for the formal sources of credit. ii) For e.g. Banks are required to maintain a minimum cash balance out of the deposits received by them. iii) The RBI monitors that the banks actually maintain the cash balances. iv) The RBI supervises that the banks give loans not just to the profit making business and traders but also to the small cultivators and small scale industries etc. v) Periodically banks have to submit information to the RBI on how much they are lending, to whom and at what interest rate, etc. 16) Distinguish between Central Bank of the country and Commercial Banks. RBI or The Central Bank Commercial Banks It is called bank of all banks. It functions under the guidelines of the Central bank of the country. It controls the flow of credit and money It contributes to the flow of credit and in the market. money in the market. There is no public dealing Such banks directly deal with the public and depends on the same. It’s custodian of foreign exchange Commercial banks have role into it. reserves of the country and issues currency.  It is an advisor to the government of the Such banks don’t have any advisory role monetary matters and focuses on and work for profit. economic and social welfare. 17) Should there be a supervisor, such as the Reserve bank of India (RBI) that looks into the loan activities of formal lenders? How does RBI do this supervision? Would the supervision of the informal sector by RBI be a difficult task? Explain. i) Yes, there is a need for supervision by the RBI over the functioning of the commercial banks as commercial banks includes private banks and they aim at profit maximization. So if they are not supervised they may indulge into improper practices. ii) RBI monitors that the banks actually maintain the cash balances. iii) It also supervises that the banks give loans not just to profit making businesses and industries but also to small and marginal farmers, small scale industries, to small borrowers etc. iv) Banks have to submit information to the RBI on how much they are lending, to whom and at what rate, etc. v) However, gathering information about informal sector loans and monitoring them would be a cumbersome task for the RBI as there are too many informal lenders and sometimes wrong information may be provided. 18) How does cost of borrowing affect the borrower? OR Why should credit at reasonable rates be available for all? i) Interest rate is the cost of borrowing. ii) High interest rate means a large part of the earnings of the borrowers is used to repay the loan. iii) Borrowers have less income left for themselves. iv) In some cases the high rate of interest can also mean that the amount to be repaid is greater than income of the borrower. It could also lead to increase in debt and push the person into a debt trap. v) People who might wish to start an enterprise by borrowing may not do so because of high cost of borrowing. 19) Why are rural households dependent on the informal sources of credit despite its limitations? OR Why do you think that the share of formal sector credit is higher for the richer households compared to the poor households?  i) This is because banks are not present everywhere in the rural areas. ii) Borrowing loans from banks is much more difficult than getting loan from informal lenders. iii) Absence of collateral is one of the major reasons which prevent the poor from getting bank loans. iv) Informal lenders such as moneylenders, provide loans to the borrowers because they know borrowers personally and give loans without the collateral v) If necessary the borrowers can approach the informal lenders for a new loan without the repaying their earlier loans. 20) Why is it necessary to reduce the share of informal sector credit and increase formal sector credit? OR It is necessary that banks and cooperatives increase their lending particularly in the rural areas so that dependence on informal sources of credit reduces. Justify the statement by giving examples. i) There is a need to reduce dependence on informal sources of credit to save the rural people from exploitation by the informal sources of credit like money lenders traders etc. ii) Most loans from informal lenders carry a very high interest rate and do little to increase the income of the borrowers. The poor are exploited and no records of repayment are maintained. They are pushed into debt trap. iii) The formal sector still meets only about half of the total credit needs of the rural people. Then remaining credit needs are met from informal sources. It is important that formal sector credit is distributed more equally so that the poor benefit from cheap loans. iv) 85% of the loans taken by poor households in the urban areas are from informal sources. Only 10% of rich urban households’ loans are from informal sources while 90% are from formal sources. v) Rich households are availing cheap credit from formal lenders whereas the poor households are borrowing loan from informal lenders and paying a heavy price for their borrowing. vi) Thus banks and cooperative societies have to increase the lending facilities to improve the livelihood of the people in rural areas. 21) How can cheap credit lead to economic development? i) Banks and cooperatives need to lend more at reasonable rates of interest. This would lead to higher incomes because many people could then borrow cheaply for a variety of needs.  ii) They could grow crops, do business, set up small scale industries, etc. iii) They could set up new industries or trade in goods. iv) Most loans from informal lenders carry a very high interest rate and do little to increase the income of the borrowers. v) Thus cheap and affordable credit is crucial for development of a country. 22) Given that a large number of people are poor in India; does that affect the capacity to borrow? i) Yes, the poverty of people always affects their capacity to borrow money. They don’t possess the required collaterals. ii) Sometimes the poor people hesitate to borrow money because they have the fear of repayments in terms of interest and principal amount. iii) For the poor people, the terms of credit also make it difficult to borrow money. 23) How do the cooperative societies help the rural households. OR “Cooperatives provide various benefits to people in rural areas”. Explain. i) The cooperatives or cooperative societies are a major source of cheap credit in rural areas. ii) Members of a cooperative pool their resources for cooperation in certain areas. There are several types of cooperatives such as farmers’ cooperatives, weavers’ cooperatives, credit cooperatives, etc. iii) The credit cooperatives accept deposits from its members. With these deposits as collateral, the cooperatives can obtain a large loan from the bank. iv) These funds are used to provide loans to members. Once these loans are repaid, another round of lending can take place. v) These cooperatives provide loans for the purchase of agriculture implements, loans for cultivation and agricultural trade, fishery loans, loans for construction of houses and for a variety of other expenses. 24) Write a short note on Self-Help-Groups in meeting the financial needs of the rural sector. OR “In recent years, people have tried out some newer ways of providing loans to the poor. The idea is to organize rural poor, in particular women, into small SHGs.” In what way SHGs meet the loan requirement of the people? OR Discuss the importance/ role/ of SHG (Self Help Group) in bringing about development in the economy. OR “SHGs are the building blocks of organization of the rural poor”. Explain. The objectives/role/importance of the SHGs are- i)Reduce dependence on informal sources of credit: The Self Help Groups (SHGs) have been set up in India with an aim to help the rural poor, especially women in order to reduce dependency on informal sector of credit. ii)To organize the rural poor especially women into SHGs. A typical SHG has 15-20 members belonging to same neighborhood who meet and save regularly particularly rural women. Savings per member vary from Rs.25 to Rs.100 or depending upon their ability to save. The group decides as regards the loans to be granted and is responsible for the repayment of the loan. iii)To provide loans without collaterals at reasonable rates of interest- If the SHG saves regularly for a year or two, they become eligible for getting a loan from the bank Banks sanction loans in the name of SHGs at reasonable rate of interest even when they do not have collateral which is meant to create self-employment opportunities amongst the members, to continue with their economic activities, to finance the ongoing expenditure and if needed invest on fixed capital, for releasing mortgage land, housing material, or for acquiring assets like sewing machine, cattle etc. iv)Building blocks of organization of the rural poor: Self-help groups are building blocks of organization of the rural poor by helping women become financially self-reliant, empowering women, developing leadership abilities among the poor and needy people. v)Discuss Social Issues: It provides a platform to discuss and act on a variety of social issues such as education, health nutrition, domestic violence etc. 25) “Banks are willing to lend to the poor women when organized in SHGs, even though they have no collaterals.” What can be the reason behind it? i) The Self Help Groups (SHGs) have been set in India with an aim to help the rural poor, especially women. SHGs came into existence in order to reduce dependency on informal sector of credit. ii) A typical SHG has 15-20 members belonging to same neighborhood who meet and save regularly particularly rural women. Savings per member vary from Rs.25 to Rs.100 or depending upon their ability to save. The group decides as regards the loans to be granted and is responsible for the repayment of the loan. If the SHG saves regularly for a year or two, they become eligible for getting a loan from the bank. Banks sanction loans in the name of SHGs at reasonable rate of interest. iii)The SHGs decide regarding the loan activities- the purpose, the amount, interest to be charged, repayment schedule etc. iv)It is the group which is responsible for the repayment of the loans. v)Any case of non-repayment of the loan by any of the members is followed up seriously by other members in the group. Because of this feature, banks are willing to lend to the poor women when organized in SHGs, even without the collaterals.