CHAPTER 3 - MONEY AND CREDIT (ECONOMICS CLASS 10)

1. How does the use of money make it easier to exchange things?

In a barter system where goods are directly exchanged without the use of money, double coincidence of wants is an essential feature. Imagine how difficult it would be if the shoe manufacturer had to directly exchange shoes for wheat without the use of money. He would have to look for a wheat growing farmer who not only wants to sell wheat but also wants to buy the shoes in exchange. That is, both parties have to agree to sell and buy each other’s commodities. This is known as double coincidence of wants. What a person desires to sell is exactly what the other wishes to buy. 

2. How does the use of money make it easier to exchange things?

The use of money makes it easier to exchange things because money acts as an intermediate in the exchange process, it is called a medium of exchange. It solves the problem of double coincidence of wants.

3. In what ways does the Reserve Bank of India supervise the functioning of banks? Why is this necessary?

The Reserve Bank of India monitors the amount of money that banks loan out, and also the amount of cash balance maintained by them. 

It also ensures that banks give out loans not just to profiteering businesses but also to small cultivators, small-scale industries and small borrowers.

Periodically, banks are supposed to submit information to the RBI on the amounts lent, to whom and at what rate of interest. 

This monitoring is necessary to ensure that equality is preserved in the financial sector, and that small industries are also given an outlet to grow.

The fall of one bank can lead to the collapse of many more. Knowing that banks are supervised reassures both markets and depositors, reducing the likelihood of bank runs and other forms of financial contagion.

4. Analyse the role of credit for development. 

A large number of transactions in our day-to-day activities involve credit in some form or the other. 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. Those who assert that credit influences growth stress that the financial system, especially banking, facilitates efficient allocation of resources from savers to borrowers with productive investment opportunity, thereby promoting economic growth.

5. Manav needs a loan to set up a small business. On what basis will Manav decide whether to borrow from the bank or the moneylender? Discuss. 

Manav will decide whether to borrow from the bank or the money lender on the basis of the following terms of credit. 

(a)rate of interest

(b)requirements availability of collateral and documentation required by banker.

(c)mode of repayment. 

Depending on these factors and of course, easier terms of repayment, Manav has to decide whether he has to borrow from the bank or the money lender. 

6. In India, about 80 per cent of farmers are small farmers, who need credit for cultivation. Why might banks be unwilling to lend to small farmers?

Small farmers normally have no collateral to pledge against loans. Collateral is an asset that the borrower owns and uses this as a guarantee to a lender until the loan is repaid. That is why banks have no interest to lend to small farmers.

7. What are the other sources from which the small farmers can borrow?

The other sources of borrowing are from money lenders, employer, self-help group, land lord, etc Agricultural traders, relatives and friends are other informal sources of rural credit. Some farmers borrow from agricultural traders who supply the farm inputs (such as seeds, fertilizers, pesticides, etc.) on credit at the beginning of the cropping season and repay the loans after the harvest.

(c) Explain with an example how the terms of credit can be unfavourable for the small farmer.
An example of unfavourable terms of credit for the small farmer is Shiva is a small farmer. He borrows money at the rate of 4 % per month (i.e., 48 % per annum) from a local money lender to grow his crop. But the crop fails due to severe drought. As a result Shiva has to sell a part of his land to repay the loan.
(d) Suggest some ways by which small farmers can get cheap credit.
The way by which small farmers can get cheap credit is from sources like regional rural banks, agricultural co-operatives, and SHGs
8. In what ways Government can increase employment in the rural sector?

The goverment can take up many measures such as construction of new dams, canals, roads, etc., where a large number of people can be provided employment in rural areas. Trading facilities and loans at cheaper rates can also improve employment scenario in the country.

9. Explain the role of Self-Help Groups (SHGs) in the rural society. 

The group takes decisions about loans to be granted - the purpose , amount , interest to be charged , repayment schedule etc. Any case of non-repayment of a loan by any one member is followed up seriously by other members of the group. Thus, the SHGs help borrowers overcome the problem of lack of collateral 

10. Explain the significance of The Reserve Bank of India in the Indian economy.

Reserve Bank of India (RBI) is India's central bank. It controls the monetary policy concerning the national currency, the Indian rupee. The basic functions of the RBI are the issuance of currency, to sustain monetary stability in India, to operate the currency, and maintain the country's credit system.