Question 1: In situations with high risks, credit might create further problems for the borrower. Explain.
Answer:
High-risk situations with credit can lead to a debt trap for the borrower. Borrowing at high-interest rates, if faced with failure, exacerbates the situation. Borrowers must repay loans with interest, potentially leading to selling land to settle debts.
Question 2: How does money solve the problem of double coincidence of wants? Explain with an example of your own.
Answer:
- Double coincidence of wants: Matching desires to buy and sell goods directly in a barter system.
- Money as solution: Money acts as an intermediary, eliminating the need for specific matches in exchanges.
Example: Trader selling rice can use money received to buy cereals, bypassing the need for direct barter.
Question 3: How do banks mediate between those who have surplus money and those who need money?
Answer:
Banks mediate between depositors with surplus funds and borrowers in need by lending deposited money. Depositors earn interest, while borrowers pay higher interest rates.
Question 4: Look at a 10 rupee note. What is written on top? Can you explain this statement?
Answer:
Currency notes in India bear the inscriptions “Reserve Bank of India” and “Guaranteed by the Central Government.” The Reserve Bank of India, as the central bank, issues currency on behalf of the government.
Question 5: Why do we need to expand formal sources of credit in India?
Answer:
Formal sources of credit, authorized by the government, offer loans at lower interest rates compared to informal sources. Expanding formal credit sources in India is crucial to curb unfair practices of informal lending at high rates. Access to formal credit enables individuals to borrow for personal and national development without exploitation.
Question 6: What is the basic idea behind the SHGs for the poor? Explain in your own words.
Answer:
SHGs in India: Aid rural poor, especially women, through pooled savings and low-interest loans.
Usually 15-20 members from the same area.
Members save from daily wages, borrow during emergencies.
Promote small-scale employment and entrepreneurship.
Accumulate savings to access bank loans.
Question 7: What are the reasons why banks might not be willing to lend to certain borrowers?
Answer:
Reasons banks may hesitate to lend money:
1. Incomplete documentation from borrowers.
2. Irregular income and lack of stable employment.
3. Borrowers listed as NPAs.
4. High risk associated with lending to entrepreneurs.
Question 8: In what ways does the Reserve Bank of India supervise the functioning of banks? Why is this necessary?
Answer:
Reserve Bank of India (RBI) supervises public sector banks by:
1. Monitoring cash balance maintenance.
2. Providing loans to small cultivators and industries.
3. Periodically reporting loan amounts.
4. Regulating interest rates in public sector banks.
Question 9: Analyse the role of credit for development.
Answer:
Credit is vital for a country’s development, aiding various sectors like agriculture and small-scale industries. In India, credit enables modern farming methods and supports businesses, contributing to overall development.
Question 10: 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.
Answer:
Manav, setting up a small business, should consider:
Comparing interest rates between bank and moneylender, opting for the lower rate.
Ensuring he has all necessary documents for bank loan approval.
Deciding on repayment terms, considering his financial situation.
Question 11: In India, about 80 per cent of farmers are small farmers who need credit for cultivation.
a. Why might banks be unwilling to lend to small farmers?
Answer:
Banks may hesitate to lend to small farmers due to:
1. High risks associated with crop failure impacting repayment.
2. Lack of proper documentation, a requirement for bank loans, among small-scale farmers.
b. What are the other sources from which the small farmers can borrow?
Answer:
Small farmers may resort to informal sources of credit if unable to borrow from banks. Informal sources include moneylenders, agricultural traders, etc.
c. Explain with an example of how the terms of credit can be unfavorable for the small farmer.
Answer:
Small-scale farmers borrowing from banks must repay at a fixed interest rate. Crop failure during harvest can lead to inability to repay, trapping farmers in debt.
d. Suggest some ways by which small farmers can get cheap credit.
Answer:
Small farmers can get cheap credit from formal sources of credit like banks.
Question 12: Fill in the blanks:
- Majority of the credit needs of the _________________households are met from informal sources.
Answer: Poor
- ___________________costs of borrowing increase the debt-burden.
Answer: High
- __________________ issues currency notes on behalf of the Central Government.
Answer: Reserve Bank of India
- Banks charge a higher interest rate on loans than what they offer on __________.
Answer: Deposits
- _______________ is an asset that the borrower owns and uses as a guarantee until the loan is repaid to the lender.
Answer: Collateral
Question 13: Choose the most appropriate answer.
- In an SHG, most of the decisions regarding savings and loan activities are taken by
- Bank
- Members
- Non-government organisation
Answer: b. Members
- Formal sources of credit do not include
- Banks
- Cooperatives
- Employers
Answer: c. Employers
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