CBSE Class 10 Economics Money And Credit Worksheet

Question.Which one of the following is the appropriate meaning of collateral?
(a) It is the sum total of money borrowed from banks.
(b) The amount borrowed from friends.
(c) It is an asset of the borrower used as guarantee to a lender.
(d) The amount invested in a business.

Answer : C

Question. Banks use the major portion of the deposit to:
(a) Keep reserve so that people may withdraw
(b) Meet their routine expenses
(c) Extend loans
(d) Meet renovation of the bank

Answer : C

Question. Which one of the following is a major reason that prevents the poor from getting loans from the banks?
(a) Lack of capital
(b) Not affordable due to high rate of interest
(c) Absence of collateral security
(d) Absence of mediators

Answer : C

Question. Banks give out loans and charge .......... on the loan amount from the borrower.
(a) rent
(b) wages
(c) interest
(d) money

Answer : C

Question. Which one of the following is the important characteristic of modern form of currency?
(a) It is made from precious metal
(b) It is made from thing of everyday use
(c) It is authorised by the commercial banks
(d) It is authorised by the Government of the country

Answer : D

Question. Which of the following is not an advantage of self-help group?
(a) Grant of timely loans
(b) Reasonable interests
(c) A platform to discuss various issues
(d) Does not help women to become self-reliant.

Answer : D

Question. Which one of the following is not included in the terms of credit?
(a) Rate of Interest
(b) Mode of payment
(c) Rate of saving
(d) Collateral

Answer : A

Question. At present which form of money is increasingly used apart from paper money?
(a) Commodity money
(b) Metallic money
(c) Plastic money
(d) All the above

Answer : C

Question. Which of the following does not constitute a part of informal credit in India? 
(A) Commercial Bank
(B) Moneylenders
(C) Friends and relatives
(D) Zamindars

Answer : A

Question. Which one of the following was not a traditional form of money? 
(A) Grains
(B) Paper notes
(C) Cattle
(D) Gold coins

Answer : B

Question. A deposit with a bank that can be withdrawn whenever the depositor likes to do so, is termed as: 
(A) a demand deposit
(B) a time deposit
(C) a fixed deposit
(D) a legitimate deposit

Answer : A

Question. Which one of the following is not a limitation of the barter system? 
(A) Lack of double coincidence of wants.
(B) Certain products can’t be divided.
(C) Most often double coincidence of wants is not available.
(D) None of the above

Answer : D

Question. The functioning of the formal source of credit is supervised by: 
(A) Government of India
(B) Reserve Bank of India
(C) Ministry of Finance
(D) None of the above

Answer : B

Question. Which one of the following options describe ‘Collateral’? 
(A) Double coincidence of wants
(B) Certain products for barter system
(C) Trade in barter system
(D) Asset as guarantee for loan

Answer : D

Question. A cheque like currency notes act as: 
(A) cash
(B) a store of value
(C) a medium of exchange
(D) a demand deposit

Answer : C

Question. Who issues currency notes in India? 
(A) Reserve Bank of India
(B) State Bank of India
(C) Ministry of Finance
(D) Government of India

Answer : A

Question. Banks do not give loans to: 
(A) small farmers.
(B) marginal farmers.
(C) industries.
(D) people without proper collateral and documents.

Answer : D

Question. The number of members in a typical SHG varies between: 
(A) 5 and 10
(B) 15 and 20
(C) 15 and 25
(D) 20 and 30

Answer : B

Question. 

(A) (i)-(c), (ii)-(d), (iii)-(b), (iv)-(a)
(B) (i)-(a), (ii)-(b), (iii)-(c), (iv)-(d)
(C) (i)-(b), (ii)-(a), (iii)-(d) , (iv) -(c)
(D) (i)-(d), (ii)-(c), (iii)-(a), (iv)-(b)

Answer : A

Question. Find the incorrect option from the following:
(A) Banks accept deposit and also pay an amount as interest.
(B) People's money is safe with banks.
(C) Banks provide loans only to profit-making businesses.
(D) It is easy for individuals to get credit who have savings and current account in the banks.

Answer : C

Question. Arrange the following in the correct sequence:
(i) Online payment, Debit card, Credit cards
(ii) Precious metal coins (gold, silver, copper)
(iii) Grain and Cattle
(iv) Modern Currency-Paper notes and coins
Options:
(A) (iv) - (i) - (ii) - (iii)
(B) (iii) - (ii) - (i) - (iv)
(C) (iii) - (ii) - (iv) - (i)
(D) (ii) - (iv) - (iii) - (i)

Answer : C

Question. Find the incorrect option from the following:
(A) Poor households still depend on informal sources of credit.
(B) RBI supervises the functioning of informal sources of loans.
(C) Banks are not present everywhere in the rural areas.
(D) RBI monitors the banks in actually maintaining cash balance.

Answer : B

Question. Analyze the information given below, considering one of the following correct options:
Mohan is an agricultural labourer. There are several months in a year when he has no work and needs credit to meet his daily expenses. He depends upon his employer, the landowner for credit who charges an interest rate of 5 per cent per month. Mohan repays the money by working physically for the landowner on his farmland.
Over the years his debt will –
(A) Increase - because of increasing interest and non-payment of monthly amount.
(B) Remain constant - as he is working for the employer but is repaying less.
(C) Reduce - as amount equivalent to his salary is being counted as monthly repayment.
(D) Be totally repaid - as he is repaying the debt in the form of physical labour.

Answer : A

Question. Analyze the information given below, considering one of the following correct options:
Mahesh is a small farmer. He has taken a loan of ₹ 2 lakhs from the money leader to meet the expenses of cultivation. The annual interest rate on the loan is very high, so he is unable to repay the loan and he is caught in a debt. He has to sell a part of the land to pay off the debt.
(A) Terms of credit
(B) Interest on loan
(C) Debt-trap
(D) Mode of repayment

Answer : C

Question. Analyze the information given below, considering one of the following correct options:
Ramu is a shoe manufacturer and he wants to directly exchange shoes for rice without the use of money. Now he will have to look for a rice growing farmer who not only wants to sell rice but also wants to buy the shoes in exchange.
(A) Double coincidence of wants
(B) Goods exchange with goods
(C) Goods exchange with money
(D) None of the above

Answer : A

Question. Analyze the information given below, considering one of the following correct options:
Rita has taken a loan of ₹ 7 lakhs from the bank to purchase a car. The annual interest rate on the loan is 14.5 per cent and the loan is to be repaid in 3 years in monthly instalments. The bank retained the papers of the new car as collateral, which will be returned to Rita only when she repays the entire loan with interest.
(A) Mode of re-payment
(B) Terms of credit
(C) Interest on loan
(D) Deposit criteria 

Answer : B

Question. Find the incorrect option from the following:
(A) Demand deposit share the essential features of money.
(B) With demand deposit payments can be made without cash.
(C) Demand deposits are safe way of money transformation.
(D) Demand deposit facility is like cheque.

Answer : D

Question. 

(A) (i)-(a), (ii) -(b), (iii)-(c), (iv)-(d)
(B) (i)-(b), (ii) -(c), (iii)-(d), (iv)-(a)
(C) (i)-(d), (ii)-(c), (iii)-(b), (iv)-(a)
(D) (i)-(c), (ii)-(a), (iii)-(b), (iv)-(d)

Answer : B

Question. Analyze the information given below, considering one of the following correct options:
Megha has taken a loan of ₹ 6 lakhs from the bank to purchase a house. The annual interest rate on the loan is 14 per cent and the loan is to be repaid in 12 years in monthly installments. Megha had to submit to the bank, documents showing her employment records and salary before the bank agreed to give her the loan.
(A) Interest on loan
(B) Formal source of loan
(C) Informal source of loan
(D) None of the above

Answer : B

Question. Analyze the information given below, considering one of the following correct options:
A shopkeeper Sudha has to make a payment to the wholesaler and writes a cheque for a specific amount to the wholesaler. The wholesaler takes this cheque and deposits it in his own account in the bank. The money is transferred form one bank account to another bank account in a couple of days. The transaction is completed without any payment of cash.
(A) Check payment
(B) Interest on deposits
(C) Demand deposit
(D) Money transfer

Answer : C

Assertion and Reason Based MCQs :

Directions : In the following questions, A statement of Assertion (A) is followed by a statement of Reason (R). Mark the correct choice as:
(A) Both A and R are true and R is the correct explanation of A.
(B) Both A and R are true but R is NOT the correct explanation of A.
(C) A is true but R is false.
(D) A is false and R is true.
(D) A is wrong and R is correct.

Question. Assertion (A): Banks give loans not only to profitmaking businesses but also to small cultivators.
Reason (R): The RBI supervises the functioning of formal sources of loans.

Answer : A

Question. Assertion (A): Periodically, banks have to submit information to the Finance Minister on how much they are lending, to whom, at what interest rate, etc.
Reason (R): The Finance Minister monitors the banks in actually maintaining cash balance.

Answer : D

Question. Assertion (A): Banks charge a higher interest rate on loans than what they offer on deposits.
Reason (R): The difference between what is charged from borrowers and what is paid to depositors is their main source of income.

Answer : A

Question. Assertion (A): No individual or organisation is allowed to issue currency notes in India.
Reason (R): In India, only RBI issues currency notes on behalf of the Central Government.

Answer : A

Question. Assertion (A): Banks keeps a small proportion of their deposits as cash with themselves.
Reason (R): This is kept to meet the loan requirements of the people.

Answer : C

Question. Assertion (A): The facility of demand deposits makes it possible to settle payments without the use of cash.
Reason (R): Demand deposits are paper orders which make it possible to transfer money from one person’s account to another person’s account.

Answer : D

Case-based MCQs :

Read the extract given below and answer the questions that follow:

Bartering is the act of trading one good or service for another without using a medium of exchange such as money. A bartering economy differs from a monetary economy in a variety
of ways. When barter was used as an exchange medium, the needs of people were very limited. This trading method doesn’t involve money and it relies solely on exchanging goods and services for other services and goods in return. The use of money spans a very large part of our everyday life. To understand the usefulness of money, we must consider what the world
would be like without money. How would people exchange goods and services? Economies without money typically engage in the barter system. Barter is highly inefficient for trying to coordinate the trades in a modern advanced economy. In an economy without money, an exchange between two people would involve a double coincidence of wants, a situation in which both the 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. In a barter system where goods are directly exchanged without the use of money, double coincidence of wants is an essential feature. Another problem with the barter system is that it does not allow us to easily enter into future contracts for purchasing many goods and services. Money solves the problems that the barter system creates. Money serves as a medium of exchange, which means that money acts as an intermediary between the buyer and the seller. Modern forms of money include currency — paper notes and coins. The other form in which people hold money is as deposits with banks.

Question. In a barter system:
(A) goods are exchanged for money.
(B) goods are exchanged for foreign currency.
(C) goods are exchanged without the use of money.
(D) goods are exchanged on credit.

Answer : C

Question. Which of the following can be considered as modern form of Money?
(A) Paper note
(B) Gold Coins
(C) Silver Coins
(D) Copper coins

Answer : A

Question. Which of the following has an essential feature of double coincidence?
(A) Money system
(B) Barter system
(C) Financial system
(D) Banking system

Answer : B

Question. Which of the following feature of money acts as an intermediate in the exchange process?
(A) Medium of exchange
(B) Unit of value
(C) Store of value
(D) None of the above

Answer : A

Read the source given below and answer the questions that follow:

Banks use the major portion of the deposits to extend loans. There is a huge demand for loans for various economic activities. Banks make use of the deposits to meet the loan requirements of the people. In this way, banks mediate between those who have surplus funds (the depositors) and those who are in need of these funds (the borrowers). Banks charge a higher interest rate on loans than what they offer on deposits. 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. In rural areas, the main demand for credit is for crop production. Crop production involves considerable costs on seeds, fertilisers, pesticides, water, electricity, repair of equipment, etc. The various types of loans can be conveniently
grouped as formal sector loans and informal sector loans. Among the former are loans from banks and cooperatives. The informal lenders include moneylenders, traders, employers,
relatives and friends, etc. The Reserve Bank of India supervises the functioning of formal sources of loans. For instance, we have seen that the banks maintain a minimum cash balance out of the deposits they receive. The RBI monitors the banks in actually maintaining cash balance. There is no organisation which supervises the credit activities of lenders in the informal sector. They can lend at whatever interest rate they choose. There is no one to stop them from using unfair means to get their money back. Compared to the formal lenders, most of the informal lenders charge a much higher interest on loans. Thus, the cost to the borrower of informal loans is much higher. In recent years, people have tried out some newer ways of providing loans to the poor. The idea is to organise rural poor, in particular women, into small Self-Help Groups (SHGs) and pool (collect) their savings.

Question. Compared to the formal lenders, most of the informal lenders charge a much ________ interest on loans:
(A) lower
(B) constant
(C) higher
(D) no interest

Answer : C

Question. An agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payment.
(A) Credit (loan)
(B) Chit fund
(C) Bank
(D) Cheque

Answer : A

Question. Banks use the major portion of the deposits to:
(A) keep as a reserve so that people may withdraw.
(B) meet their routine expenses.
(C) extend loans.
(D) meet renovation of the bank.

Answer : C

Question. Formal sector loans include loans from:
(I) Banks
(II) Moneylenders
(III) Cooperatives
(IV) Traders
(A) (i) and (iii)
(B) (ii) and (iv)
(C) (ii) and (iii)
(D) (i) and (iv)

Answer : A

Read the source given below and answer the questions that follow:

The use of money spans a very large part of our everyday life. Look around you and you would easily be able to identify several transactions involving money in any single day. Can you make a list of these? In many of these transactions, goods are being bought and sold with the use of money.
In some of these transactions, services are being exchanged with money. For some, there might not be any actual transfer of money taking place now but a promise to pay money later. Have you ever wondered why transactions are made in money? The reason is simple. A person holding money can easily exchange it for any commodity or service that he or she might want. Thus, everyone prefers to receive payments in money and then exchange the money for things that they want. Take the case of a shoe manufacturer. He wants to sell shoes in the market and buy wheat. The shoe manufacturer will first exchange shoes that he has produced for money, and then exchange the money for wheat. Imagine how much more 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. In a barter system where goods are directly exchanged without the use of money, double coincidence of wants is an essential feature. In contrast, in an economy where money is in use, money by providing the crucial intermediate step eliminates the need for double coincidence of wants. It is no longer necessary for the shoe manufacturer to look for a farmer who will buy his shoes and at the same time sell him wheat. All he has to do is find a buyer for his shoes. Once he has exchanged his shoes for money, he can purchase wheat or any other commodity in the market. Since money acts as an intermediate in the exchange process, it is called a medium of
exchange.

Question. Why transactions are made in money?
(A) Money is easy to get.
(B) Money is accepted as a medium of exchange.
(C) Everyone has money reserves in their house.
(D) All of the Above.

Answer : B

Question. How would had the shoe manufacturer directly exchanged shoes for wheat without the use of money?
(A) Both parties have to agree to sell and buy each other’s commodities.
(B) He compels the farmer to give him wheat on compassionate grounds.
(C) He forces the farmer to take the shoes from him in exchange of wheat.
(D) He approaches the bank authorities.

Answer : A

Question. Why barter system is no longer practiced?
(A) Considered illegal.
(B) People do not have that much things to exchange.
(C) It is difficult to find two parties that have something they both want to trade.
(D) Government keeps a check on such an activity.

Answer : C

Question. In ____________ both parties have to agree to sell and buy each other’s commodities.
(A) Double Coincidence of wants
(B) Barter System
(C) Bank Regulation
(D) Personal Agreements

Answer : B

Read the extract given below and answer the questions that follow:

Cheap and affordable credit is crucial for the country’s development. The various types of loans or credits can be grouped as formal sector loans and informal sector loans. Among the former are loans from banks and cooperatives. The informal lenders include moneylenders, traders, employers, relatives and friends. Banks and cooperatives give loans on a lesser interest rate than the informal sector. But bank loans require proper documents and collateral. Absence of collateral is one of the major reasons why bank loans are not available to small farmers and people who wish to start small industries. Compared to the formal lenders, most of the informal lenders charge a much higher interest on loans. Thus, the cost to the borrower of informal loans is much higher. Higher cost of borrowing means a larger part of the earnings of the borrowers is used to repay the loan. For these reasons, banks and cooperative societies need to lend more to the poorer section of people. This would lead to higher incomes and many people could then borrow cheaply for a variety of needs. They could grow crops, do business, set up small-scale industries et(c) They could set up new industries or trade in goods.

Question. Identify the types of loans or credits can be grouped into:
(a) Formal sector
(b) Informal sector
(c) Both (a) and (b)
(d) Only(a)
Answer : C

Question. What is the main reason that bank loans are not available to small farmers?
(a) Lack of proper documents
(b) Absence of collateral
(c) Both (a) and (b)
(d) None of the above
Answer : C

Question. Which of the following is not a part of informal source oflenders?
(a) RBI
(b) Commercial banks
(c) Moneylenders living in rural areas
(d) Both (a) and (b)
Answer : D

Question. Which one of the following statements is true regarding loans provided by formal and informal sector?
(a) Formal lenders charge a much higher interest on loans than informal lenders.
(b) Informal lenders charge a much higher interest on loans than formal lenders.
(c) Cost to the borrower of informal loans is much lower than formal loans.
(d) Both (b) and (c)
Answer : B

 

Very Short Answer Type Questions :

Question. Give one example of money which is not in the form of currency (cash). 
Answer : By cheque
OR
Debit/Credit Card.

Question. What are the two forms of modern currency?
Answer : Paper notes and coins.

Question. Give one example each of modern currency and old currency. 
Answer : (i) One example of modern currency- Paper notes and coins,
(ii) One example of old currency- Commodity currency.

Question. Why do farmers require credit?
Answer : To purchase the raw materials and inputs for agriculture.

Question. What is Barter System? 
Answer : It is a system of exchange in which goods are directly exchanged without the use of money.

Question. Why do banks maintain cash reserve?
Answer : To arrange for daily withdrawals by depositors.

Question. Why one cannot refuse a payment made in rupess in India? 
Answer : Because it is authorized by the Government of India.

Question. Give any one example of the methods to make payment without using cash.
Answer : Online transfer, by cheque

Question. Explain the importance of 'Collateral'.
Answer : Importance of ‘Collateral’:
It is used as a guarantee to a lender until the loan is repaid. 

Question. Why are most of the poor households deprived from the formal sector of loans? 
Answer : Because they cannot fulfil the formalities of the formal sector of loans.

Question. Explain the importance of formal sector loans in India. 
Answer : Importance of formal sector loans in India:
Low interest rate.

Question. Who supervises the functioning of formal sources of loan? 
Answer : Reserve Bank of India (RBI).

Question. Give any two examples of informal sector of credit.
Answer : (i) Credit from 'moneylenders'.
(ii) Credit from 'family members'.

Question. Why do banks or lenders demand collateral against loans? 
Answer : Bank or lenders demand collateral against loans as it is used as a guarantee to a lender until the loan is repaid. 

Question. What is collateral?
Answer: Collateral is an asset that the borrower owns such as land, building, vehicle, livestock, deposits with the banks and uses these as a guarantee to the lender until the loan is repaid.

Question. Why is the supervision of the functioning of formal sources of loans necessary?
Answer : It is necessary to supervise the functioning of formal sources of loans because the banks have to maintain a minimum cash balance out of the deposits they receive. They should also provide loans to small cultivators, mall scale industries etc.

Question. Define money.
Answer : Money is anything which has common acceptability as a means of exchange, a measure and a store of value.

Question. Define credit.
Answer : Credit refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payments with interest.

Question. Why can one not refuse a payment made in rupees in India?
Answer : One cannot refuse a payment made in rupees in India because it is authorised by the government of India. It is accepted as a medium of exchange all over the country.

Question. What is meant by double coincidence of wants?
Answer : Double coincidence of wants means owner of good X, say shoes, to find someone else with good Y, say wheat, and both being in need of each other’s good

Question. Why is money called ‘a medium of exchange’?
                               OR
How does money act as a medium of exchange?
Answer : Money acts as an intermediary in the process of exchange, thus it is called a medium of exchange.

Question. How does money eliminate the need for double coincidence of wants?
Answer : Money solves the problem of double coincidence of wants by acting as a medium of exchange.

Question. Which are the two major sources of formal loan for rural households?
Answer : Banks and Cooperatives
 

Short Answer Type Questions :

Question. Describe the functioning of Self Help Group. (SHG)
Answer :
i. A typical SHG has 15-20 members, usually belonging to one neighbourhood, who meet and save regularly.
ii. Saving per member varies from Rs 25 to Rs 100 or more, depending on the ability of the people to save.
iii. Members can take small loans from the group itself to meet their needs. The group charges interest on these loans but this is still less than what moneylenders charge.
iv. Loan is sanctioned in the name of the group and is meant to create self-employment opportunities for the members.
v. Most of the important decisions regarding the savings and loan activities are taken by the group members. The group decides as regards the loans to be granted — the purpose, amount, interest to be charged, repayment schedule etc.
vi. Also, it is the group which is responsible for the repayment of the loan. Any case of nonrepayment of loan by any one member 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 though they have no collateral as such.
vii. Thus, the SHGs help borrowers overcome the problem of lack of collateral. They can get timely loans for a variety of purposes and at a reasonable interest rate. Moreover, SHGs are the building blocks of organization of the rural poor.
viii. Not only does it help women to become financially self-reliant, the regular meetings of the group provide a platform to discuss and act on a variety of social issues such as health, nutrition, domestic violence, etc.

Question. In what ways does the Reserve Bank of India supervise the functioning of banks? Why is it necessary? (Explain any 4 main functions of the RBI)
Answer :
i. The RBI monitors that all banks actually maintain the minimum cash balance. No bank is allowed to lend from the cash reserves.
ii. Similarly, the RBI sees that banks give loans not just to profit-making businesses and traders but also to small cultivators, small scale industries, to small borrowers etc.
iii. Periodically, banks have to submit information to the RBI on how much they are lending, to whom, at what interest rate, etc.
iv. It is necessary to make the activities of all banks uniform in the country. It also helps to prevent unfair practices in banking.

Question. Why is moneylender still the largest single source of credit?
Or Why are the poor households still depending on informal sources of credit in India?
Answer :
i. Banks are not present everywhere in rural India. Even if it is present, it is not easy to get loans from a bank since many procedures are required.
ii. Absence of collateral and documentation required in formal sector, forces poor households to depend on informal sectors like moneylenders where such collateral and documentations are not required.
iii. Since the lender and the borrower in informal sector are personally known to each other availability of loan is easy at any time required.

Question. Mr. S.(c) Pan wants to learn about barter system but he is not able to understand double coincidence of wants. What is double coincidence of wants?
Answer : Both parties have to agree to sell and buy each other’s goods.

Question. Mr. Shyam was given a check which he took to the bank but he was not given any money. When he asked about it, the cashier told him that check had A/C payee written on it. What does it mean?
Answer : A/C means payment in account only.

Question. Mr. Jay Singh wants to get a loan for opening a cloth shop in main market. Which source of credit would be better for him and why?
Answer : Formal source of credit is better for him because
(a) Rate of interest in low (b) Lender cannot use unfair means to get money back (c) His chances of getting caught in debt trap are low.

Question. Rohan and Rohit are fighting over which type of money should be included in modern form of money. Rohan says only paper notes and coins should be included in the list but Rohit says currency and deposits in banks should be include(d) Who is right?
Answer : Rohit is right because both currency and deposits in banks are considered modern money

Question. Ms. Manisha has taken membership of a Self-Help group named Saraswati Self-Help group. Help Mr. Chennram to help her understand about Self-Help group.
Answer :
(a) An informal association of people who come together to find ways to improve their living conditions. They are generally self-governed and peer controlle(d)
(b) It is basically a community where 15-20 members generally women, usually belonging to one neighborhood meets and save regularly.
(c) Members can take small loans from the group itself to meet their needs on low interest rate.

Question. Explain the social and economic values for which it is necessary to expand formal sources of credit in Indi(a)
Answer : (a) To reduce dependence on informal sources of credit reduces.
(b) To make sure that that everyone receives loans.

Question. Why do we need to expand formal source of credit in India? 
OR
Explain any three reasons for the banks and cooperative societies to increase their lending facilities in rural areas. 
Answer : Expand formal sources of credit in India
(i) To save people from the exploitation of Informal sector,
(ii) Formal charge a low interest on loans,
(iii) To save from debt trap,
(iv) It provides cheap and affordable credit,
(v) RBI also supervises the formal sector credit through various rules and regulations which ensures that banks give loans to small cultivators, small borrowers, etc. and not just to profit making business and traders.
OR
Answer : Banks and Cooperatives can help people in obtaining cheap and affordable loans. This will help people to grow crops, do business set up small scale industries or trade goods and also help indirectly in the country’s development.
(i) They should do so, so that relatively poor people do not have to depend on informed sources of credit.
(ii) Formal sector loans need to expand. It is also necessary that everyone receives these loans.
(iii) At present it is the richer households who receive formal credit whereas the poor have to depend on informal sources. It is important that the formal credit is distributed more equally so that poor can be benefitted from the cheaper loans.

Question. Dhananjay is a government employee and belongs to a rich household, whereas Raju is a construction worker and comes from a poor rural household. Both are in need and wish to take loan. Create a list of arguments explaining who between the two would successfully be able to arrange money from a formal source. Why?
Answer : Dhananjay will be able to get a loan from a formal source.
Arguments:
• Banks are not present everywhere in rural India.
• Even when they are present, getting a loan from a bank is much more difficult than taking a loan from informal sources.
• Bank loans require proper documents and collateral. Absence of collateral is one of the major reasons which prevents the poor from getting bank loans.
Informal lenders such as moneylenders, on the other hand, know the borrowers personally and hence, are often willing to give a loan without collateral. 

Question. Explain the role of Self Help Groups in the rural economy. 
Answer : The role of Self-Help Groups:
(i) Self-Help Groups are small groups (especially from rural areas) who pool their resources and individual savings together to help the others in need of funds.
(ii) Facilitates the members to employ themselves in numerous self-employment opportunities.
(iii) Help in raising the living standards of the concerned members.
(iv) Reduces the dependence on the informal credit sources.
(v) Thus, with the help of SHGs, the rural poor become economically independent and their dependence on the local moneylenders who charge a high rate of interest is also reduced.

Question. Describe the significance of the Reserve Bank of India. 
Answer : It is the Reserve Bank of India, which controls the functioning and supervises the activities of the formal sectors in India.
It also acts as the guardian of all the monetary policies in our country.
It monitors the balance kept by banks for day-today transactions.
Periodically, banks have to give details about lenders, borrowers and interest rate to RBI. Thus, RBI plays a significant role in our country.

Question. Why do banks and co-operative societies need to lend more? Explain. 
Answer : Banks and cooperative societies need to lend more:
(i) This would lead to higher incomes.
(ii) People could borrow cheaply for a variety of needs.
(iii) They could grow crops and set up small-scale industries, etc.
(iv) Cheap and affordable credit is crucial for the country’s development.
(v) To save and reduce the dependence on informal sources of credit.
(vi) It is important that the formal credit is distributed more equally so that the poor can benefit from the cheaper loans.

Question. Why is modern currency accepted as a medium of exchange without any use of its own? Find out the reason. 
Answer : Modern currency is accepted as a medium of exchange without any use of its own because:
(i) Modern currency is authorised by the government of a country.
(ii) In India, the Reserve Bank of India issues all currency notes on behalf of the central government.
(iii) No other individual or organisation is allowed to issue currency.
(iv) The law legalises the use of rupee as a medium of payment that cannot be refused in settling transactions in India.
(v) No individual in India can legally refuse a payment made in rupees. 

Question. How is money transferred from one bank account to another bank account? Explain with an example. 
Answer : Money transfer from one bank account to another bank account:
If a person has to make a payment to his or her friend and writes a cheque for a specific amount, this means that the person instructs his bank to pay this amount to his friend. His friend takes this cheque and deposits it in his account in the bank. This said amount is transferred from one bank account to another bank account.

Question. Why are service conditions of formal sector loans better than informal sector? Explain.
Answer : Service conditions of formal sector are better than those of informal sector because:
(i) These resources work under the supervision of the Reserve Bank of India. Their rate of interest is very low.
(ii) Commercial banks and cooperative societies are the main source of formal source of credit. They provide ensured services and also have a set protocol for deliverance of loan services.
(iii) In formal sector- interest rate, collateral and documentation requirement, and the mode of repayment together comprise what is called the terms of credit. The terms of credit vary
substantially from one credit arrangement to another. They may vary depending on the nature of the lender and the borrower.

Question. Imagine yourself to be XYZ, a member of a women Self Help Group. Analyse the ways through which your group provides loan to the members.
Answer : (i) Self Help Groups pool their savings. 
(ii) A typical SHG has 15–20 members, usually belonging to one neighbourhood, who meet and save regularly.
(iii) Saving per member varies from Rs. 25 to Rs. 100 or more, depending on the ability of the people to save.
(iv) Members can take small loans from the group itself to meet their needs.
(v) The group charges interest on these loans but this is still less than what the moneylender charges.
(vi) After a year or two, if the group is regular in savings, it becomes eligible for availing loan from the bank. 

Question. How can money be easily exchange itself for goods or services? Give example to explain.
Answer : Money acts as a medium to exchange itself for goods and services:
A person holding money can easily exchange it for any commodity or service that he or she wants. Everyone prefers to receive payments in money and exchanges the money for things he wants.
For example: A shoemaker wants to sell shoes in the market and buy wheat. The shoemaker will first exchange shoes for money and then exchange the money for wheat. If the shoemaker had to directly exchange shoes for wheat without the use of money, he would have to look for wheat growing farmer who not only wants to sell wheat but also wants to buy the shoe in exchange. Both parties have to agree to sell and buy each other's commodities. This process is very difficult, time consuming and unhealthy.

Question. Mention three points of difference between formal sector and informal sector loans.
Answer : Formal sources of credit preferred over informal sources of credit because:
(i) Formal sources have low cost of borrowing.
(ii) Higher Income through cheap borrowing.
(iii) No exploitation and debt trap.
(iv) Any other relevant point

Question. Why are formal sources of credit preferred over the informal source of credit? Give three reasons. 
Answer : Formal sources of credit preferred over informal sources of credit because:
(i) Formal sources have low cost of borrowing.
(ii) Higher Income through cheap borrowing.
(iii) No exploitation and debt trap.
(iv) Any other relevant point 

Question. Why is it necessary to increase of a large number of banks mainly in rural areas? Explain.
Answer : It is necessary to increase a large number of banks mainly in rural areas because:
(i) The cost of informal loans is much higher and often leads to a debt trap. Also, people who might wish to start a new enterprise by borrowing may not do so because of the high cost of borrowing in such a case.
(ii) Most loans from informal lenders carry a very high interest rate and make less increase in the income of the borrowers. Thus, it is necessary that banks and cooperatives should increase their lending particularly in the rural areas, so that the dependence of the poor on informal sources of credit reduces.
(iii) It is important that the formal credit sources like banks are distributed more equally in rural and urban areas so that the poor can benefit from the cheaper loans.

Question. “Poor households still depend on informal sources of credit”. Support the statement with examples.
Answer : Poor households still depend on informal sources of credit because:
(i) Banks are not present everywhere in the rural areas.
(ii) Even when they are present, getting a loan from the bank is much more difficult than taking a loan from informal sources.
(iii) Mega banks or public sector banks require proper documents and collateral.
(iv) Absence of collateral is one of the major reasons which prevents the poor from getting bank loans.
(v) Informal lenders such as moneylenders know the borrowers personally and they are willing to give a loan without collateral. 

Question. “The credit activities of the informal sector should be discouraged.” Support the statement with arguments.
Answer : Credit activities of the informal sector should be discouraged:
(i) Most loans from informal lenders carry a very high interest rate and do little to increase the income of the borrowers.
(ii) The poor households have to pay a large amount for borrowing.
(iii) 85% of the loans taken by poor households in the urban areas are from informal sources.
(iv) Cheap and affordable credit is crucial for the country’s development.
(v) Any other relevant point.

Question. Describe the importance of formal sources of credit in the economic development.
Answer : We need to expand the formal sources of credit for economic development because of the following reasons:
(i) Supervision: The formal sources work under the supervision of the RBI. The RBI monitors that the banks actually maintain cash balance and give loans to small cultivators and farmers too. On the other hand, there is no organization which supervises the credit activities of lenders in the informal sector. They can lend at any interest rate as per their discretion.
(ii) Lower rate of interest: The rate of interest in the formal sectors is decided by the RBI. So normally, the interest rate is low.
(iii) Formal sources of credit: Banks might not be willing to give loans to certain borrowers if they already have procured a loan or if they don't have enough cash balance in that bank or if they don't have anything that they can use as a collateral. In such conditions, development of formal sources of credit can prove to be useful.

Question. Describe the bad effects of informal sources of credit on borrowers. 
Answer : Bad effects of informal sources of credit on borrowers:
(i) Most of the informal lenders charge a much higher interest on loans. Thus, the cost to the borrower of the informal loans is much higher.
(ii) Higher cost of borrowing means a larger part of earning of the borrowers is used to repay the loan and they have less income left for themselves.
(iii) The high rate of interest of borrowing can mean that the amount to be repaid is greater than the income of the borrower and it can lead to increasing debt and debt-trap.
(iv) People who might wish to start an enterprise by borrowing may not do so because of the high cost of borrowing. 

Question. What is meant by term of credit? What does it include? 
Answer : Terms of credit are the requirements need to be satisfied for any credit arrangements. It includes interest rate, collateral, documentation and mode of repayment. However, the terms of credit vary depending upon the nature of lender, borrower and loan.

Question. Why is cheap and affordable credit important for the country's development? Explain any three reasons.
Answer : Importance of cheap and affordable credit for the country's development:
(i) Cheap and affordable credits would lead to higher income.
(ii) Many people could borrow for a variety of needs.
(iii) It encourages people to invest in agriculture, do business and set up small scale industries, etc.
(iv) It enables more investment which will lead to acceleration of economic activities.
(v) Affordable credit would also end the cycle of debt-trap.
(vi) Any other relevant point. 

Question. Explain any three loan activities of banks in India.
Answer : Loan activities of Banks in India:
(i) Banks use the major portion of the deposits to extend loans.
(ii) Banks make use of the deposits to meet the loan requirements of the people.
(iii) Banks mediate between those who have surplus funds (the depositors) and those who are in need of these funds (the borrowers).
(iv) Banks charge a higher interest rate on loans than what it offers on deposits.
(v) Any other relevant point.

Long Answer Type Questions :

Question. Describe the vital and positive role of credit with examples.
OR
What is credit? How does credit play a vital and positive role? Explain with an example.
Answer : ‘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.
Credit plays a vital and positive role as:
(i) Credit helps people from all walks of life in setting up their business, increase their income and support their families.
(ii) To some people, loan helps a lot in constructing their houses and get relief from monthly rent.
(iii) To others, it helps a lot in raising their standards of living.
(iv) Example of Salim, credit helps him and he is able to increase his earnings. 

Question. How do banks mediate between those who have surplus money and those who need money?
Answer : (i) Banks keep a small proportion of their deposits as cash with themselves.
(ii) Major portion of deposits is used for extending loans.
(iii) The banks mediate between depositors and borrowers in this way.
(iv) They charge high rate of interest on loans than what they offer on deposits. 

Question. ‘‘The rupee is widely accepted as a medium of exchange.’’ Explain. 
Answer : The rupee is widely accepted as a medium of exchange because:
(i) The currency is authorised by the government of the country.
(ii) In India, the Reserve Bank of India issues currency notes on behalf of the central government.
(iii) The law legalises the use of rupee as a medium of payment that cannot be refused in settling transactions in India.
(iv) No individual in India can legally refuse a payment made in rupees. Hence, the rupee is widely accepted as a medium of exchange. 

Question. “Credit sometimes pushes the borrower into a situation from which recovery is very painful.” Support the statement with examples.
Answer : It is true that credit sometimes pushes the borrower into a situation from which recovery is very painful. It happens in cases like:
(i) In case of rural area if crop fails due to natural factors, it will be difficult to repay.
(ii) In case of failure of a business it will be difficult to repay interest.
(iii) In situations with high risks, credit might create further problems for the borrower.
(iv) In the situation when borrower is unable to pay previous loan and he takes new loan.
(v) Loans taken by poor people from informal lenders sometimes, lead them to debt trap because of high interest rate.

Question. How can the formal sector loans be made beneficial for poor farmers and workers? Suggest any five measures.
Answer : Formal sector loans can be made beneficial for poor farmers and workers in the following ways:
(i) Create awareness to farmers about formal sector loans.
(ii) Process of providing loans should be made easier. It should be simple, fast and timely.
(iii) More number of Nationalized Banks/Cooperative Banks should be opened in the rural sector.
(iv) Banks and cooperatives should increase facility of providing loans so that dependence on informal sources of credit reduces.
(v) The benefits of loans should be extended to poor farmers and small scale industries.
(vi) While formal sector loans need to expand, it is also necessary that everyone receives these loans. 

Question. Why is it necessary for banks and cooperatives to increase their lending in rural areas? Explain.
Answer : Necessity for the banks and cooperative societies to increase their lending facilities in rural areas:
(i) Dependence on informal sources of credit reduces.
(ii) To provide more loan facilities to rural households.
(iii) To save rural people from exploitation.
(iv) It is important that the formal credit is distributed more equally so that the poor can benefit from the cheaper loans.
(v) The bank and the cooperative societies have to increase the lending facilities to improve the livelihood of the people in the rural areas.

Question. Why is money transaction system better than barter system? Explain with examples. 
Answer : (i) Transaction system is better than a barter system because the double coincidence of wants creates a problem.
(ii) For example, a shoe manufacturer wants to sell shoes in the market and wants to buy wheat. For this, he would look for a wheat growing farmer who would exchange his wheat with the shoes.
(iii) In a barter system, goods are exchanged without the use of money.
(iv) In contrast, in an economy where money is in use; money provides the crucial intermediate step.

Question. How do banks play an important role in the economy of India? Explain.
Answer : Banks play an important role in developing the economy of India:
(i) They keep the money of the people in their safe custody.
(ii) They give interest on the deposited money to the people.
(iii) They mediate between those who have surplus money and those who are in need of money.
(iv) They provide loan to a large number of people at the low interest rate.
(v) They promote agricultural and industrial sector by providing loans.
(vi) They also provide funds to different organisations.

Question. Why is cheap and affordable credit important for the country’s development? Explain any three reasons.
OR
Why is credit a crucial element in the economic development?
OR
“Cheap and affordable credit is crucial for the country’s development.’’ Explain the statement with five points. 
Answer : Importance of cheap and affordable credit for the country’s development:
(i) Cheap and affordable credit would lead to higher income.
(ii) Many people could borrow for a variety of needs
(iii) It encourages people to invest in agriculture, do business and set up small scale industries etc. 
(iv) It enables more investment which will lead to the acceleration of economic activities.
(v) Affordable credit would also end the cycle of the debt trap.
(vi) Any other relevant point.

Question. Explain any two features each of formal sector loans and informal sector loans.
Answer : Formal Sector Loans: Include loans from banks and cooperatives. Features of formal sector loans are:
(i) Formal sectors provide cheap and affordable loans and their rate of interest is monitored by Reserve Bank of India.
(ii) Formal sector strictly follows the terms of credit, which include interest rate, collateral, documentation and the mode of repayment. Informal Sector Loans: Include loans from
moneylenders, traders, employers, relatives, friends, etc.
Features of informal sector loans are:
(i) Their credit activities are not governed by any organisation, therefore they charge a higher rate of interest.
(ii) Informal sector loan providers know the borrowers personally, and hence they provide loans on easy terms without collateral and documentation. 

Question. What are demand deposits? Explain any three features of it.
OR
Which type of deposits with the banks are called demand deposits? State some important features of demand deposits. 
Answer : People save their money in banks by opening an account. The deposits in the bank accounts can be withdrawn on demand, so these deposits are called demand deposits.
(i) Banks accept the deposits and also pay an interest rate on the deposits. In this way, people’s money is safe with the banks and it also earns interest.
(ii) The facility of cheques against demand deposits makes it possible to directly settle payments without the use of cash. Since, demand deposits are accepted widely as a means of payment, along with currency, they constitute money in the modern economy.
(iii) It is authorised by the government of the country. 

Question. Which are the two major sources of formal sectors in India? Why do we need to expand the formal sources of credit?
Answer : The two major sources of formal sources of credit are:
(i) Banks and
(ii) Cooperatives.
Need to expand formal sources of credit are:
(i) To save the poor farmers and workers from the exploitation by the informal sector credit.
(ii) Informal sector charges a higher interest on loans which means that a large part of the earnings is used to repay the loan.
(iii) Formal credit can fulfil various needs of the people by providing cheap and affordable credit.

Question. “Bank plays an important role in the economic development of the country.” Support the statement with examples. 
Answer : Bank plays an important role in the economic development of the country in many ways:
(i) Bank provides loan in rural area for crop production ultimately resulting in the development of many places.
(ii) Bank provides loan to create fixed assets that will create employment opportunities.
(iii) It acts as a link between savers and investors i.e. people who have surplus money and those who are in need of money.
(iv) Banks accepts the deposit and pay an amount as interest on the deposit which mobilizes savings.
(v) Bank uses major portion of these deposits to extend loan for the industrial and agricultural sector. They also provide funds to different organisations.

Question. How are deposits with the bank beneficial for individual as well as for the nation? Explain with examples. 
Answer : The deposits with banks are beneficial for the individual as well as for the nation:
(i) Banks accept deposit and also pay an amount as interest and in this way people earn money.
(ii) People’s money is safe with banks.
(iii) It is easy for individuals to get credit who have savings and current account in the banks.
(iv) Poor people who are engaged in production need credit.
(v) Credit provided by the banks for government projects helps in the development of the nation.
(vi) Banks provide loans for the promotion of International trade.
(vii) Development of infrastructure is undertaken with the loans provided by the banks.