Money and Credit Class 10 NCERT Solutions, PYQs & Notes

Ans: In situations with high risk (like farming, which depends on monsoons), credit can push the borrower into a debt trap. For example, if a farmer takes a loan for seeds and fertilizers, but the crop fails due to bad weather, he cannot repay the loan. To repay the existing loan, he might have to take a fresh loan or sell a part of his land. Thus, instead of improving his earnings, credit leaves him worse off.

Ans: In a barter system, a person wanting to buy something must have what the seller wants (Double coincidence of wants). Money solves this by acting as a medium of exchange.
Example: A shoe manufacturer wants to buy wheat. In a barter system, he must find a farmer who wants shoes in exchange for wheat (very difficult). With money, he simply sells his shoes in the market for money, and uses that money to buy wheat from any farmer.

Ans: The Reserve Bank of India (RBI) supervises the functioning of formal sources of loans.
1. It ensures that banks maintain a minimum cash balance (15% in India) out of the deposits they receive.
2. It monitors that banks give loans not just to profit-making businesses and traders, but also to small cultivators, small-scale industries, and small borrowers.
3. It prevents banks from exploiting customers and ensures the stability of the financial system.

Ans: Cheap and affordable credit is crucial for the country’s development. If loans have high interest rates, a major part of the borrower's earnings goes into repaying the loan, leaving very little for themselves. It discourages people from starting small businesses or adopting modern farming methods. Reasonable rates help people increase their incomes and standard of living.

Ans: The barter system was an old method of exchange where goods were directly exchanged for other goods without the use of money. For example, a farmer giving wheat to a potter in exchange for clay pots.

Ans: Modern currency (paper notes and coins) is accepted as a medium of exchange because it is authorized by the government of the country. In India, the Reserve Bank of India issues currency notes on behalf of the central government, and the law legally mandates its use for settling transactions.

Ans: People deposit their extra cash in bank accounts. Since the deposits in the bank accounts can be withdrawn "on demand" (whenever the depositor wants), these deposits are called demand deposits.

Ans: A cheque is a paper instructing the bank to pay a specific amount from the person’s account to the person in whose name the cheque has been issued. It allows the direct settlement of payments without the use of physical cash.

Ans: Banks act as mediators by accepting deposits from people who have surplus money and using that money to provide loans to people who need money. Banks charge a higher interest rate on loans than what they offer on deposits. The difference between what is charged from borrowers and what is paid to depositors is their main source of income.

Ans: Examples of collateral used for borrowing include land titles, building property, vehicles, livestock, and standing deposits with banks. If the borrower fails to repay, the lender has the right to sell the collateral to recover payment.

Ans: Banks may deny loans to certain borrowers (especially the poor) because they might lack the required 'collateral' (security) to guarantee the loan. Additionally, they might not have a steady source of income or proper documentation required by formal banking laws.

Ans: Besides banks, cooperative societies are another major source of cheap formal credit in rural areas. Members of a cooperative pool their resources for cooperation in certain areas. Examples include Krishak Cooperatives (for farmers) and Weavers Cooperatives.

Ans: Banks are not present everywhere in rural India. Even when they are present, getting a loan requires proper documents and collateral, which poor households lack. The paperwork is complex and intimidating for uneducated rural workers.

Ans: There is no organization or government body that supervises the credit activities of lenders in the informal sector. As a consequence, they lend at whatever interest rate they choose, use unfair methods to get their money back, and often push poor borrowers into a debt trap.

Ans: When an SHG gets a bank loan, the loan is sanctioned in the name of the group, not any single individual. The group as a whole is responsible for the repayment of the loan. If any member defaults, other members follow up seriously. This peer pressure is why banks are willing to lend to SHGs without collateral.

Ans: Started in the 1970s by Nobel Laureate Prof. Muhammad Yunus, the Grameen Bank of Bangladesh is a massive success story of meeting the credit needs of the poor at reasonable rates. It proved that poor women are reliable borrowers who can start and run small businesses successfully if given access to credit.

Ans: While it is largely true that poor households depend heavily (around 85%) on informal sources, even richer households sometimes use informal sources. However, the vast majority of credit for rich households comes from formal sources (banks) at much cheaper rates.

Ans: Money acts as a common measure of value. The prices of all goods and services (like a pair of shoes or a kg of wheat) are expressed in terms of money, making it easy to compare the value of different items in the economy.

Ans: While formal banks provide cheap credit for large farming and industries, their reach is limited due to collateral requirements. SHGs fill this gap by providing micro-credit to the poorest of the poor (especially women) without collateral, while still keeping interest rates lower than the exploitative moneylenders.