Table of Contents
Money and Credit Notes class 10
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The benefits of deposits with the banks are:
- They can be encashed by issuing cheques in the name of the person to whom the payment is to be made.
- They make it possible to directly settle payments without the use of cash.
- Since demand drafts/cheques are widely accepted as a means of payment along with currency, they constitute money in the modern economy.
- “Whether credit will be useful or not, depends upon the situation.” Give two different examples in support of this statement.
Ans. The two examples showing whether credit will be useful or not, depends upon the situation are:
Chirag is a shoe manufacturer. During the festival season, he receives an order for 3,000 pair of shoes to be completed in a month. He employs two more workers for pasting and stitching. He takes an advance payment from a large trader for 1,000 pair of shoes. He asks the leather supplier to supply leather and payment would be made later. Chirag completes the order in a month, makes a good profit and repay all the money that he had borrowed.
Sapna, a small farmer, grows groundnut in her three acres of land. She took a loan from the moneylender, hoping to repay the loan, once the crop is harvested. Being hit by the pest, the crop fails. Expensive pesticides did not make any difference. Sapna is unable to repay the moneylender and the other year, it becomes a bigger amount. Next year again, she took a loan for cultivation. It is not a bumber crop this year too.
Sapna earns little, but it is not enough to repay the old loans. She had to sell a part of the land to repay the loan. She is caught in a debt. This situation is called debt-trap. Hence, we can say that it depends on situation whether credit will be useful or not.
73.Explain any four terms of credit with examples.
Ans. The four terms of credit are:
Interest rate. The borrower has to pay a sum of money as interest along with the principal amount.
Collateral. It is an asset that the borrower owns and uses this as a guarantee – to the lender untill the loan is repaid.
Documentation. Proper documents of borrowing with all the terms and conditions must be submitted.
Mode of repayment. The mode through which the borrower will repay the loan must be clearly mentioned. Long-term loans can be repaid in annual, half yearly or monthly installments
74. Differentiate between formal sector credit and informal sector credit.
Or
Mention any three points of distinction between formal sector loans and informal sector loans.
| Formal Sector | Informal Sector Credit |
| (a) This credit is provided by banks and cooperative societies to the borrowers. (b) The Reserve Bank of India (RBI) supervises the (E functioning of formal sector loans. It periodically d checks the interest rate and other details of the sources. (c) Proper terms of credit like collateral, documentation, C rate of interest and mode of payment are followed. (d) They provide cheap and affordable credit with common terms of credit for all. (e) They charge less interest rates as compared to informal sectors. | (a) This credit is provided by traders, moneylenders, employers, relatives, friends, etc. (b) There is no government or private organisation db which supervises the informal sector loans. (c) Terms of credit are flexible for the personal benefit of the lenders and pitiable condition of borrowers. (d) They exploit the borrowers for their own benefits. (e) Their rate of interest is much higher than that of formal sector. |
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75. Why is cheap and affordable credit important for a country’s development? Explain with reasons.
Or
Describe the importance of formal sources of credit in the economic development.
Ans. Cheap and affordable credit is crucial for a country’s development because:
(a) More lending would lead to higher incomes and encourage people to invest in agriculture, engage in business and set up small industries.
(b) Cheap credit will enable more investment. This leads to acceleration of economic activity.
(c) Cheap credit would also allow weaker sections of society to access formal sector of lending and get rid of from informal moneylenders.
(d) Affordable credit would also end the cycle of debt trap.
(e) Cheap and easy terms of credit would inspire better investment in technology and thus increase competition.
76. What are the various sources of credit in rural areas? Which one of them is the most convenient source of credit? Why is it most convenient? Give two reasons.
Ans. Various sources of credit in rural areas are:
(a) Agricultural traders
(b) Moneylenders
(c) Commercial banks
(d) Cooperative societies
(e) Relatives and friends
The most convenient source of credit is the moneylender because of the following reasons.
(a) There is no need of documentation process while taking loan from informal sources, such as moneylenders.
(b) No collateral security is required. Collateral is an asset that the borrower owns such as land, building, livestock etc. and uses this as a guarantee to the lender until the loan is repaid.
77. What are the two main reasons for formal credit not being available to the rural poor? Why is there a need to expand rural credit?
Ans. The two main reasons for formal credit not being available to rural poor are:
(a) Absence of collateral and documentation is the main reason which prevents rural getting loans from banks. poor from
(b) The arrangements of informal sector loans are flexible in terms of timeline, procedural requirements, interest rates, etc. They are adjustable according to the needs and convenience of the borrower. This attracts the borrowers.
There is a need to expand rural credit from the side of formal sector because of the following reasons:
(a) Informal sectors exploit rural poor by pushing them in debt-trap. is
(b) Cheap and affordable credit for rural poor important for the country’s overall development.
(c) With this credit, the rural poor can grow crops, do business or set up small-scale industries.
78. The credit activities of the informal sector should be discouraged”. Support the statement with arguments.
Ans. It is correct to state that the credit activities of the informal sector should be discouraged. This can be further substantiated with the following points.
(a) There is no organisation as such which supervises, the credit activities of the lenders in the informal sector. As a result, they charge exorbitant rates of interest which vary from borrower to borrower.
(b) They, thereby, indulge in exploitative practices involving unfair means to get their money back from the borrowers.
(c) As the cost of borrowing is very high in the informal sector, a larger part of the income of the borrower is used to repay the loan, i.e., the borrower has less income left for himself.
(d) In certain cases, the amount to be repaid is greater than the income of the borrower. This in turn leads to increasing burden of debt which culminates in a debt-trap.
(e) In this sector, those people who wish to start an enterprise may not actually do so, because of the high cost of borrowing which acts as a deterrent.
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79. How can the formal sector loans be made beneficial for poor farmers and workers? Suggest any five measures.
Ans. The formal sector loans can be made beneficial to poor farmers and workers in following ways: (a) The process of providing loans should be made easier and accessible to them.
(b) Large number of banks and cooperatives should be opened in the rural areas.
(c) Banks and cooperatives should expand their facility of providing loans so as to decrease dependence on informal sector.
(d) Special focus should be paid on poor and small farmers along with small scale industries.
(e) Loan processing should be simple, faster and timely.
80. Why is it necessary for the banks and cooperatives to increase their lending facilities in rural areas?
Explain.
Ans. It is necessary for formal sources like banks and cooperatives to increase their lending in rural areas because of the following reasons.
(a) Formal sources are far behind in meeting the needs of the people in rural areas. Informal sources like moneylenders, traders have taken the rural areas under their influence.
(b) Informal sources charge a high rate of interest from the borrowers which makes it difficult for them to repay the loan. They get trapped in the debt-trap.
(c) Informal sources are not under any supervision from any authorised institution. They behave arbitrarily in terms of giving loans and setting terms of credit.
(d) The rich have better access to formal sources whereas poor are forced to depend on informal sources. Equal distribution of credit facilities is, therefore, required and is the need of the hour, so that the poor can also avail cheap and timely credit facilities.
(e) Formal sources of credit can help people in rural areas to avail other benefits like cold storage facilities, subsidised seeds and other agricultural inputs.
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