Money and Credit

Q1 What is double coincidence of wants?

Ans When both parties agree to sell and buy each other’s commodities, this is what is known as
double coincidence of wants. It was the main feature of barter system which restricted the
economic activities. For example, if farmer who has wheat needs shoes, he has to find a cobbler
who is willing to take wheat for selling shoes. If this happens this is what is commonly known as
double coincidence of wants.

Q2 Why money is known as medium of exchange?

Ans Money acts as an intermediate in the exchange process. That is why it is called as medium of
exchange. In simple words, money is universally acceptable by all the people as it is authorised by
the government of a country. Thus all the people use money for exchange process because of its
universal acceptability. Hence medium of exchange is the main function of money.
Q3 What are demand deposits?
Ans The deposits in the bank which can be withdrawn on demand are called as demand deposits.
People receive their salaries on the first of every month but they do not spend the entire amount
on the same day. Rather they deposit the surplus amount in the bank and whenever they need it
they withdraw it through cheques. That is why it is called as demand deposits.

Q4 What is a cheque?
Ans 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.

Q5 What is the source of income of the banks?

Ans The difference between what is charged from the borrowers and what is paid to the
depositors is the main source of income for the banks. People who have surplus money they
deposit it in the bank and bank pays interest to the depositors. After keeping some proportion of
total deposits with it, bank lends the remaining amount to those who need money and charges
higher interest rate from them. This is the main source of income of the banks.

Q6 What credit (loan) refers to?

Ans 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 repayment. It helps a person in expanding his
business activities and ultimately helps in the growth and development of a country. There are
variety of credit arrangements such as formal and informal sources of credit.
Q7 How does credit help us in various things?
Ans Credit help us to meet the ongoing expenses of production, complete production on time and
thereby increase our earnings. It is very useful in starting as well as expansion of different
economic activities. Thus it results in higher level of income and standard of living.
Q8 What is debt trap?
Ans When credit instead of helping a person improve his earnings left him worse off, is an example
of what is commonly called as debt trap. It is a situation when a person is unable to repay the loan
which he has taken and in order to repay the loan he takes the fresh one which increases the debt
on that person. Ultimately the person is caught in the debt trap.
Q9 Define collateral?
Ans Collateral is an asset that the borrower owns such as land, building, livestock or deposits with
the bank and uses this as a guarantee to a lender until the loan is repaid.

Q10 what is meant by terms of credit?

Ans Interest rate, collateral documentation and mode of repayment together comprise what is
called as terms of credit.
Q11 In situations with high risks, credit might create further problems for the borrower. Explain.
Ans Definitely in situation with high risk, the credit can create further problem because in the
situation of high risk, borrower might not be in a position to repay the loan. He might have to take
a fresh loan in order to repay the previous one. Thus he will be caught in the situation of debt trap.
Secondly if the borrower is unable to repay the loan, he might have to sell off his
assets (land, houses, etc). Thus in the situation of high risk the credit can further aggravate the
problems of borrower.
Q12 How does money solve the problem of double coincidence of wants? Explain with the help of
an example of your own.
Ans Double coincidence of wants used to be an essential feature of barter system in which the
things required by one person is supplied by the other and the goods required by the other person
are supplied by the first. For example, if a shoemaker wants to purchase wheat, he will have to find
out wheat growing farmer who needs shoes.
But, lack of existence of double coincidence of wants created a problem for the economy. Money
solves this problem of exchange by eliminating the need of double coincidence of wants. With the
help of money the goods can be exchanged for money and this money can further be used to buy
the required commodities. For example, the shoe maker can sell the shoes in the market and get
the money and with the help of this money, he can purchase wheat.

Q13 How do banks mediate between those who have surplus money and those who need money?
Ans Banks mediate between the depositors and the borrowers. The depositors who possess the
surplus money deposit it with the bank by opening a bank account and the bank pays interest to
the depositors. Banks keep 15% of these deposits as cash with themselves and supply the rest of
money to the borrowers at higher rate of interest. Thus banks act as mediator between borrowers
and depositors.

Q14 Look at the 10 rupee note. What is written on top? Can you explain this statement?
Ans On the top of 10 rupee note it is written – “ I promise to pay the bearer the sum of ten
rupees”
This statement means that 10 rupee note is issued by central bank of India i.e. Reserve Bank of
India (RBI) on behalf of central government and RBI promises to pay 10 rupees to the owner of the
note.
Q15 Why do we need to expand formal sources of credit in India?
Ans In India, 52% credit is supplied by formal sources whereas huge part i.e. 48% of credit is still
supplied by the informal sources. The formal sources of credit need to be expanded on the
following grounds:
1. Formal sources provide the credit at low rate of interest
2. Under formal sources of credit , there is no exploitation of the borrower
3. No unfair means are used to get back the loan by the formal sources
4. RBI supervises the formal sources of credit.
Q16 What is the basic idea behind SHGs for the poor? Explain in your own words.
Ans The basic idea behind SHGs is to organise the rural poor especially the women to mobilise their
small savings and avail them timely loans for a variety of purposes at a reasonable rate of interest
without any collateral.
The SHGs have 15 – 20 members belonging to one neighbourhood who meet and save
regularly from Rs 25 to Rs 100. If the group is regular in savings, it becomes eligible for availing loan
from the bank. Loan is sanctioned in the name of group for creating self employment
opportunities. The group itself is responsible for the repayment of loan. Thus SHGs help the
borrower overcome the problem of lack of collateral.

Q17 What are the reasons why banks might not be willing to lend to certain borrowers?
Ans The banks might not be willing to lend to following borrowers:-
i. Those who do not possess collateral.
ii. Those who do not fulfil the needful formalities of documentation.
iii. Those who do not have the repayment capacity.
iv. Those who require the loan for unproductive purpose.
Q18 In what ways does the RBI supervises the functioning of banks? Why is this necessary?

Ans RBI supervises functioning of banks in the following ways:-

i. RBI checks whether the banks maintain the minimum cash balance.
ii. RBI sees whether the credit is being granted for the productive purposes.
iii. RBI looks that banks give loan not just to profit making businesses and traders but also to
small cultivators, small scale industries and small borrowers.
iv. RBI periodically monitors that how much the banks are lending and at what interest rate.

Q19 Analyse the role of credit for development of an economy.

Ans Credit plays a vital role in the development of an economy which can be analysed in the
following ways:-
Agricultural Development: Credit helps in the agricultural development because with the help of
credit the farmers purchase high yielding variety seeds, fertilisers, pesticides and agricultural tools
and equipments. These modern farming tools help in the growth of agriculture.
Industrial Development: Credit helps the industrialists to purchase the required raw material and
industrial machinery. Thus credit helps in the growth of industries.
Development of Trade: Credit helps the importers and exporters to increase their trade and
business activities.
Development of other economic activities: Credit also helps in the promotion of other economic
activities such as services like tourism and communication.
Q20 Manav needs loan to set up small business. On what basis ....................................?

Ans Manav’s decision depends upon the following:

i. Amount of loan required
ii. Collateral
iii. Rate of interest
iv. Mode of repayment.
v. Purpose of the loan
vi. Documentation required
vii. Term of loan
viii. Emergency to take the loan.
Q21 In India about 80% of farmers are small farmers..................................?

Ans Banks might not be willing to lend to small farmers because of the following reasons:
i. Non availability of collateral
ii. Non availability of required documents
iii. Doubt about the repayment capacity of small farmers.
iv. Uncertainty in production.

Q22 What are the other sources from where .........................?

Ans Small farmers can borrow from:
i. Money lenders
ii. Friends and relatives
iii. Self help groups
iv. Cooperative societies.

Q23 Explain with an example how the terms of credit........................?

Ans Small farmers usually take loan from the money lenders at a very high rate of interest. If the
crop fails they are not able to repay the loan so they have to sell off their land in order to repay the
loan. Thus terms of credit become unfavourable for the small farmers.

Q24 Suggest some ways by which small farmers can get cheap credit..................?
Ans Small farmers can get the cheap credit from the following:
i. Banks
ii. Cooperative societies
iii. Self help groups