CLASS X MONEY AND CREDIT QUESTION -ANSWER

MONEY AND CREDIT Question 1. The currency notes on behalf of the Central Government are issued by whom? Answer: Reserve Bank of India. Question 2. Why do banks ask for collateral while giving credit to a borrower? Answer: Collateral is an asset that the borrower owns (land, building, vehicle, livestock, land documents, deposits with banks, etc.) which stands as a security against the money borrowed. In case the borrower fails to repay the loan, the lender has the right to sell the asset or collateral. Question 3. What do banks do with the deposits they accept from customers? Answer: Banks use a major portion of deposits to extend loans to people. Question 4. What comprises ‘terms of credit’? (2012 OD) Answer: Interest rate, collateral and documentation requirement and mode of repayment together comprise terms of credit. Question 5. What is the main informal source of credit for rural households in India? Answer: Money lenders are the main source of informal credit for rural households. Question 6. Which body supervises the functioning of formal sources of loans? Answer: Reserve Bank of India. Question 7. ‘Modern currency is without any use of its own’; then why is it accepted as a medium of exchange? Answer: Modern currency is accepted as a medium of exchange because it is certified for a particular denomination (?10, ?100, etc.) of the country by authorities set up by the Central Government. It is issued by the Reserve Bank of India and it can be used for buying any commodity which is on sale. It is authorized by the government of the country. Question 8. What is the meaning of ‘barter system’? Answer: Barter system refers to the system of exchange of goods and services. It is the system by which one commodity is exchanged for another without the use of money. Before money was introduced, people practised barter system. Example: A farmer could buy a dhoti from a weaver or a pair of shoes from a cobbler in exchange of grains he produced. Question 9. What is meant by double coincidence of wants? Answer: Double coincidence of wants means when both parties have agreed to sell and buy each other’s commodities. Question 10. How does money act as a medium of exchange? Answer: Money acts as a medium of exchange as it acts as an intermediate in the exchange process and transactions. A person holding money can easily exchange it for any commodity or services that he or she might want . Question 11. What is meaning of Barter system ? Why is double coincidence of wants is an essential feature of a Barter system ?  Answer: A system in which goods are directly exchanged without the use of money is called barter system. Double coincidence of wants means when both the parties – seller and purchaser – agree to sell and buy each other’s commodities. It implies that what a person desires to sell is exactly what the other wishes to buy. No money is used in such an arrangement. Therefore it is an essential feature of barter system. Question 12. 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 due to reasons as mentioned below : In India, the Reserve Bank of India issues currency notes on behalf of the central government. As per Indian law, no other individual or organisation is allowed to issue currency. The law legalises the use of rupee as a medium of payment that cannot be refused in settling transactions in India. No individual in India can legally refuse a payment made in rupees. Hence the rupee is widely accepted as a medium of exchange. Question 13. “Deposits in the hanks are beneficial to the depositors as well as to nation.” Examine the statement. Answer: (1) Deposits are beneficial to the depositers as mentioned below : Banks accept the deposit and pay as interest rate on the deposits. Money is safe with the bank. People (depositors) may withdraw the money as and when they require. Depositors may make payments through cheques instead of cash. (2) Deposits are beneficial for the banks too as mentioned below : Banks keep only a small proportion of deposits. Now a days, banks keep about 15 per cent as cash in order to pay the depositors who might come to withdraw money from the bank on any given day. Bank use the major portion of the deposits to extend loans. There is huge demand for loans for various economic activities. Banks make use of the deposits to meet the loan requirements of the people. Businessmen and other entrepreneurs take loans from the banks and open factories. They help in the advancement of the economy. Thus the deposits are beneficial to the nation. Question 14. What is a collateral ? What happens if a borrower fails to repay the loan ? Give some examples of collateral. Answer: 1.Collateral is an asset that the borrower owns and uses this as a guarantee to a lender until the loan is repaid. 2.If the borrower fails to repay the loan, the lender has the right to sell the asset or collateral to obtain payment. 3.Property such as land titles, deposits with banks, livestock are some common examples of collateral used for borrowing. Question 15. Explain three terms of credit.   Answer: (1) The terms of credit are as mentioned below : 1.Interest rate. 2.Collateral and documentation requirement. 3.Mode of repayment. (2) The terms of credit vary substantially from one credit arrangement to another. (3) Interest rate in the formal sector e., banks and cooperative is about 9-10 per cent but in informal sector, the moneylender and grain merchants etc. charge much higher interest. Thus the cost to the borrower of informal loans is much higher. (4) Moneylenders take collateral such as land. As the interest rate is higher and if the borrower is unable to repay for any reason, they try to exploit the borrower by taking control of the collateral e., land etc. (5) Banks insist on documentation requirement and collateral before granting loans. That is why it becomes difficult for the poor to get loans from the banks. Question 16. How is money transferred from one bank to another bank account ?  Or Describe how cheque payments are made and realised. Answer: If a person has to make a payment, he issues a cheque for a specific amount in his name such as TPDDL. The TPDDL will deposit the cheque in their own account in the bank. Thereafter, the money is transferred from one bank to another bank account in a couple of days. Thus, transaction takes place without any payment of cash from one bank account to another bank account. Question 17. What are the differences between formal and informal sectors of credit or loans ?  Or Explain any two features each of formal sector loans and informal sector loans. Answer: The main differences between formal sector and informal sector loans are as given below : Formal sector Informal sector (1) Formal sector source are banks and cooperatives. (2) The banks and cooperatives charge less rate of interest i.e., about 10 per cent per annum or so. (3) It results in more income and better condition of the borrower. There is improvement in his financial condition. (4) Reserve Bank of India supervises the functioning of formal sources of loans. (1) Informal sector sources are moneylenders, traders, employers, relatives and friends. (2) Informal sector sources charge higher interest Le., 3 to 5 per cent per month. (3) Higher rate of interest results in less income for the borrowers. It sometimes leads to debt-trap. (4) There is no organisation which supervises the credit activities of the lenders in the informal sector. They do whatever is in their interest. Question 18. Why should credit at reasonable rates from the banks and cooperatives be available for all ? Answer: 1.Credit at reasonable interest rates should be available for all so that they may increase their income and help in the over all development of the country. 2.High interest rate do little to increase the income of the borrowers. 3.It is necessary that the banks and cooperatives increase their lending particularly in rural areas, so that the dependence of the people on informal sources of credit reduces. 4.In addition to this more credit should be given to the poor to get maximum benefit from the cheaper loans. 5.This will help in increasing their income as well as standard of living. Question 19. What are Self-Help Groups ? Describe in brief their functioning including their aim and importance. Answer: (1) Atypical Self-Help Group has 15-20 members, usually belonging to one neighbourhood who meet and save regularly. (2) The functioning of SHGs is as given below : 1.Aim : The aim of Self-Help Group is to organise rural poor, women in particular and collect their savings and to take loans from the group to meet their needs. The group takes loan from the bank to create self-employment opportunities for the members. 2.Working of the SHG : Decisions on loans and savings are taken by the group members. All matters relating to the purpose, amount, interest rate, repayment schedule are decided by the group members. The group is responsible for the repayment of the loan. Non-repayment of loan by any member is followed up seriously by other members of the group. 3. Importance : (a) SHGs have helped borrowers overcome the problem of lack of collateral because the banks are willing to lend to the poor women organised in SHGs, even though they have no collateral as such. (b) The borrowers can get timely loans at a reasonable interest rate. (c) It has helped women in the rural areas to become financially self-reliant. (d) The meetings of the groups provide a platform to discuss and act on a variety of social issues such as health, nutrition and domestic violence. Thus, SHGs are playing a significant role in the improvement of the condition of the poor, particularly women.