NCERT Solutions Class 10 Understanding Economic Development Ch3 – Money and Credit

10 Class Economics Chapter 3 Money and Credit 

The chapter on Money and Credit in NCERT Class 10 Social Science Understanding Economic Development provides a comprehensive overview of the role of money and credit in the economy. It explains how money acts as a medium of exchange and a unit of account, and how credit allows individuals and businesses to borrow money to finance their activities.

The chapter also covers the different types of money, including physical currency, coins, and electronic money, and the role of banks in the creation and distribution of credit. It also discusses the importance of financial intermediaries, such as banks and other financial institutions, in facilitating the flow of credit and money in the economy.

Overall, the chapter helps students understand the fundamental role of money and credit in economic development and how they enable individuals and businesses to transact and finance their activities. It also provides a foundation for further study of economics and financial concepts in higher grades.

Textbook	NCERT
Class	Class 10
Subject	Economics
Chapter	Chapter 3
Chapter Name	Money and Credit
Category	Class 10 Economics Notes
Medium	English

Q.1 In situations with high risks, credit might create further problems for the borrower. Explain.
Ans. In situations with high risks, credit might create more problems for the borrower. This is also known as a debt-trap. Taking credit involves a certain amount of loan that is taken by a borrower from a lender at a high-interest rate.
If the borrower fails to pay back the loan amount due to some loss in his job or business, he further falls in the trap of credit. He has to repay the credit along with the interest applied by the lender. This increases the problems for the borrower. In such a situation, he is forced to give up his collateral or asset used as the guarantee, to the lender.
For example, if a farmer takes a loan for crop production and the crop fails, then it becomes nearly impossible for him to repay the loan amount along with the charged interest. To repay the loan the farmer may sell a part of his land making the situation worse than before. Due to being unable to repay the loan and harassed by the lenders, many times farmers commit suicide. Thus, in situations with high risks, if the risks affect a borrower badly, then he ends up losing more than what he would have without taking the loan.

Q.2 How does money solve the problem of double coincidence of wants? Explain with an example of your own.
Ans.
✯ Double coincidence of wants occurs when goods or commodities are exchanged without the use of money.
✯ Here, both the individuals who exchange goods are actually in need of those goods.
✯ In a barter system where goods are directly exchanged without using money, double coincidence of wants is an essential feature.
✯ By serving as a medium of exchanges, money removes the need for double coincidence of wants and the difficulties associated with the barter system.
✯ Now, no specific buyer or seller is required for interchanging of products.
✯ For example, a farmer has to sell wheat in exchange for cereals then it would be difficult for him to find such a buyer.
✯ But money will solve this problem. Now, the farmer can sell his wheat to someone who needs this and with the earned money he can buy cereals for him as well.

Q.3 How do banks mediate between those who have surplus money and those who need money?
Ans.
✯ Banks encourage the people with surplus money to invest their money with them. In return those people are paid a certain rate of interest for the same.
✯ Banks hold about 15 per cent of their deposits as cash.
✯ This is kept as provision to pay the depositors who might come to withdraw money from the bank on any given day.
✯ They use the major portion of the deposits to extend loans to those who need money.
✯ In this way banks mediate between those who have surplus money and those who need money.
✯ Banks charge a higher interest rate on loans than what they offer on deposits.
✯ The difference between the two rates is their main source of income.

Q.4 Look at a 10 rupee note. What is written on top? Can you explain this statement?
Ans.

✯ “Reserve Bank of India” and “Guaranteed by the Government” are written on top a 10 rupee note.
✯ In India, currency is issued by the Reserve Bank of India on behalf of the central government.
✯ So these two statements signify that the currency is authorized or guaranteed by the Central Government.
✯ That is, the Indian law legalizes the use of this 10 rupee note as a medium of payment anywhere in the country.

Q.5 Why do we need to expand formal sources of credit in India?
Ans. Formal sources of credit are the Government authorised organisations that are eligible to lend money to people. We need to expand these sources of credit in India due to the following reasons:
✯ The informal sources are not registered and lend money to people at very high-interest rates.
✯ With increased number of formal resources, people will be able to take loans at lesser interest rates and use them to grow their business.
✯ This will ultimately help in the development of the country.
✯ Informal lenders sometimes start harassing the borrower if he is not able to repay the loan at time. However, this is not the case with the formal sources of credit.

Q.6 What is the basic idea behind the SHGs for the poor? Explain in your own words.
Ans. The basic idea behind the SHGs for the poor is to provide a financial resource for them by organise rural poor, in particular women, into small Self Help Groups (SHGs) and pool (collect) their savings. These groups also provide loans to their members at low interest rate.
Thus, the main objectives of the SHGs is to increase small scale employment opportunities for the rural people.
These groups not only 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.

Q.7 What are the reasons why the banks might not be willing to lend to certain borrowers?
Ans. The banks might not be willing to lend certain borrowers due to the following reasons:
✯ A few people fail to provide the required set of documents to get a loan.
✯ There are some people who have not repaid previous loans. Such borrowers are come in the defaulters list. Banks might not be willing to lend them further.
✯ The banks might not be willing to lend entrepreneurs who are going to invest in the business with high risks.
✯ The banks might not be willing to lend those people who earn irregular incomes or have no fixed salary because in such cases chances of repayment of the loan are very less.

Q.8 In what ways does the Reserve Bank of India supervise the functions of Banks? Why is this necessary?
Ans. The Reserve Bank of India supervises the functions of banks in the following ways:
✯ It monitors the banks in actually maintaining cash balance.
✯ It ensures that the banks give loans not just to profit-making businesses and traders but also to small cultivators, small scale industries, to small borrowers etc.
✯ banks have to submit information to the RBI on their credit activities like how much they are lending, to whom, at what interest rate, etc.

Q.9 Analyse the role of credit for development.
Ans. Credit is one of the major aspects that determine a country’s development. There is a huge demand for loans for various economic activities. Cheap and affordable loans give people an opportunity to develop their business.
Credit plays a very crucial role in agricultural activities. People can borrow money and use it to adopt modern farming methods to increase the crop production and grow crops which are more reliable than the traditional methods. By sanctioning loans to developing industries and trade, banks provide them with the necessary aid for improvement. This leads to increased production, employment and profits that ultimately help in the development of the country.

Q.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.
Ans. Manav will decide whether to borrow from the bank or the money lender on the basis of the following things:
✯ Comparison between the rate of interest charged by the two sources.
✯ Availability of the eligible documents required by the bank to approve his loan.
✯ Mode of repayment of the loan.

Q.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?
(b) What are the other sources from which the small farmers can borrow?
(c) Explain with an example how the terms of credit can be unfavourable for the small farmer.
(d) Suggest some ways by which small farmers can get cheap credit.
Ans.
(a) Banks ask for proper documents before providing loans. But the small farmers might not be able to provide such documents. In addition to this, there is possibility that the small farmers fail to repay the loan if their crop gets ruined due to some reason. So, banks might not be willing to lend to small farmers as there are high risks.

(b) Apart from the banks, other sources from which the small farmers can borrow include informal sources of credit like local money lenders, agricultural traders, big landlords, cooperatives, SHGs etc.

(c) The terms of credit can be unfavorable for the small farmer which can be explained with the help of the following example:
If a farmer borrows money from the bank and during the harvest season his crops are ruined, then he shall not be able to repay the loan to the bank. He might have to sell  a part of his land to repay the amount. In such condition he will further fall into the debt trap.

(d) The small farmers can get cheap credit from the different sources like banks, agricultural cooperatives, and SHGs.

Q.12 Fill in the blanks:
(i) Majority of the credit needs of the __________households are met from informal sources.
(ii) __________costs of borrowing increase the debt-burden.
(iii) __________issues currency notes on behalf of the Central Government.
(iv) Banks charge a higher interest rate on loans than what they offer on __________.
(v) __________is an asset that the borrower owns and uses as a guarantee until the loan is repaid to the lender.
Ans.
i. Poor
ii. High
iii. Reserve Bank of India
iv. Deposits
v. Collateral

Q.13 Choose the most appropriate answer.
(i) In a SHG most of the decisions regarding savings and loan activities are taken by
 (a) Bank.
(b) Members.
(c) Non-government organisation. 
Ans: (b) Members

(ii) Formal sources of credit does not include
 (a) Banks.
(b) Cooperatives.
(c) Employers. 
Ans: (c) Employers.

In situations with high risks, credit might create further problems for the borrower. Explain.

In situations with high risks, credit might create further problems for the borrower because the lender may require higher interest rates to compensate for the increased risk. This can result in higher monthly payments and a longer repayment period for the borrower, which can put a strain on their financial resources.

Additionally, if the borrower is unable to repay the loan, they may default and face consequences such as damage to their credit score and difficulty obtaining future loans. This can make it more difficult for the borrower to access credit in the future and may limit their ability to finance important expenses or investments.

Overall, in situations with high risks, credit can create further problems for the borrower by increasing the cost of borrowing and increasing the risk of default, which can have negative consequences for their financial stability and future access to credit.

How does money solve the problem of double coincidence of wants? Explain with an example of your own.

Money solves the problem of double coincidence of wants by acting as a medium of exchange that can be accepted by all parties in a transaction. This means that individuals and businesses can exchange goods and services for money, which can then be used to purchase other goods and services from other sellers.

For example, consider a farmer who grows and sells apples. The farmer may not want or need the goods and services offered by the person who wants to buy the apples. However, if the buyer is willing to pay the farmer in money, the farmer can use that money to purchase the goods and services they do want or need from someone else.

In this way, money acts as a neutral intermediary that enables individuals and businesses to exchange goods and services without having to find someone who has exactly what they want and is willing to trade for it. This makes it easier to facilitate transactions and promotes economic activity and growth.

How do banks mediate between those who have surplus money and those who need money?

Banks mediate between those who have surplus money and those who need money by accepting deposits from individuals and businesses who have surplus money and lending it to those who need money. This enables individuals and businesses with surplus money to earn interest on their deposits and allows those who need money to borrow it at a cost, typically in the form of interest.

Banks also provide a range of other financial services, such as facilitating the transfer of money between accounts, issuing debit and credit cards, and offering investment and savings products. These services enable individuals and businesses to manage their financial resources and access credit when needed.

Overall, banks play a vital role in mediating between those who have surplus money and those who need money by providing a range of financial services that enable the flow of money and credit in the economy.

Look at a 10 rupee note. What is written on top? Can you explain this statement?

On top of a 10 rupee note, it is written “I promise to pay the bearer the sum of Ten Rupees.” This statement is known as a “promissory note” and indicates that the issuer of the note, in this case the Reserve Bank of India, promises to pay the holder of the note the stated amount of money.

In other words, the promissory note serves as a legal commitment by the issuer to pay the holder of the note the designated amount of money. This makes the promissory note a type of financial instrument that can be used as a medium of exchange and a store of value.

Overall, the promissory note on a 10 rupee note serves as a guarantee that the holder can exchange the note for the stated amount of money, making it a valuable and trusted form of currency.

Why do we need to expand formal sources of credit in India?

There are several reasons why it is important to expand formal sources of credit in India:

1. Access to credit is essential for economic development: Formal sources of credit, such as banks and financial institutions, enable individuals and businesses to borrow money to finance their activities. This can lead to increased economic activity and growth, as well as the creation of jobs and wealth.
2. Formal credit is more reliable: Formal sources of credit, such as banks, are regulated by the government and subject to strict oversight. This makes them more reliable and trustworthy than informal sources of credit, which may not have the same level of oversight or protection for borrowers.
3. Formal credit can improve financial inclusion: Expanding formal sources of credit can help to increase financial inclusion, particularly for those who may not have access to informal sources of credit due to lack of collateral or credit history.
4. Formal credit can reduce the reliance on informal sources of credit: In India, many people rely on informal sources of credit, such as moneylenders, who may charge high interest rates and fees. Expanding formal sources of credit can reduce the reliance on these sources and provide more affordable and reliable options for borrowing.

Overall, expanding formal sources of credit in India is important for economic development, financial stability, and financial inclusion.

What is the basic idea behind the SHGs for the poor? Explain in your own words.

The basic idea behind Self-Help Groups (SHGs) for the poor is to provide a platform for low-income individuals to come together and pool their resources to support one another financially and socially.

SHGs typically consist of small groups of 10-20 individuals who share a common goal, such as improving their financial situation or addressing a specific social issue. Members contribute a small amount of money to a common fund and use this fund to provide loans to one another or invest in income-generating activities.

The goal of SHGs is to empower the poor by providing them with a source of credit and the opportunity to improve their financial situation. In addition to providing financial support, SHGs also offer social and emotional support to their members, which can be especially important for those who may feel isolated or marginalized.

Overall, the basic idea behind SHGs for the poor is to create a supportive community of individuals who come together to improve their financial and social wellbeing.

What are the reasons why the banks might not be willing to lend to certain borrowers?

There are several reasons why banks might not be willing to lend to certain borrowers:

1. Insufficient collateral: Banks often require collateral, such as property or assets, as a form of security in case the borrower defaults on their loan. If the borrower does not have sufficient collateral, the bank may be unwilling to lend to them.
2. Poor credit history: Banks typically check the credit history of borrowers to assess their creditworthiness. If a borrower has a poor credit history, this may indicate that they have a higher risk of defaulting on their loan, which may make the bank unwilling to lend to them.
3. High risk of default: Even if a borrower has collateral and a good credit history, the bank may still be unwilling to lend to them if they perceive the borrower to be at high risk of default. This could be due to a number of factors, such as the borrower’s financial stability, business stability, or the market conditions in which they operate.
4. Lack of a clear repayment plan: Banks may be hesitant to lend to borrowers who do not have a clear plan for how they will repay the loan. This could be due to a lack of financial planning or a lack of a viable business plan.

Overall, there are a variety of factors that may cause banks to be unwilling to lend to certain borrowers, including insufficient collateral, poor credit history, high risk of default, and a lack of a clear repayment plan.

In what ways does the Reserve Bank of India supervise the functions of Banks? Why is this necessary?

The Reserve Bank of India (RBI) is the central bank of India and is responsible for supervising the functions of banks in a number of ways:

1. Setting monetary policy: The RBI sets monetary policy for the country, which includes setting interest rates and controlling the money supply. This helps to ensure that banks are able to function effectively and efficiently.
2. Regulating banks: The RBI is responsible for regulating banks in India and enforcing rules and regulations that ensure that banks operate in a safe and sound manner. This includes setting capital requirements, overseeing the risk management practices of banks, and conducting inspections to ensure compliance with regulations.
3. Providing liquidity: The RBI acts as a lender of last resort for banks, providing them with liquidity in times of financial crisis or when they are unable to obtain funds from other sources.
4. Promoting financial inclusion: The RBI is also responsible for promoting financial inclusion, which includes making sure that all individuals and businesses have access to financial services, such as credit and banking services.

Overall, the RBI’s supervision of the functions of banks is necessary to ensure that banks operate safely and soundly, and to promote financial stability and inclusion in the country.

Analyse the role of credit for development.

Credit plays a vital role in economic development by enabling individuals and businesses to borrow money to finance their activities. This can lead to increased economic activity and growth, as well as the creation of jobs and wealth.

Credit can also be used to fund investments in education, healthcare, and infrastructure, which can have long-term benefits for the economy. For example, investments in education can increase the skill levels of the workforce, which can lead to increased productivity and competitiveness.

In addition, credit can help to reduce poverty and inequality by providing access to financial resources for those who may not have access to other forms of credit. For example, microfinance initiatives, such as Self-Help Groups (SHGs), can provide credit to low-income individuals who may not have access to formal sources of credit due to lack of collateral or credit history.

Overall, credit plays a crucial role in economic development by enabling individuals and businesses to access financial resources to finance their activities and investments, which can lead to increased economic activity, growth, and development.

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.

There are a number of factors that Manav may consider when deciding whether to borrow from the bank or the moneylender:

1. Interest rates: One of the main considerations for Manav may be the interest rate charged on the loan. Banks typically offer lower interest rates than moneylenders, so Manav may prefer to borrow from the bank if he can get a lower rate.
2. Repayment terms: Manav may also consider the repayment terms of the loan, including the length of the repayment period and the amount of the monthly payments. If the bank offers more favorable repayment terms, such as a longer repayment period or lower monthly payments, Manav may prefer to borrow from the bank.
3. Collateral requirements: Banks may require collateral, such as property or assets, as a form of security in case Manav defaults on the loan. Moneylenders, on the other hand, may not require collateral. If Manav does not have sufficient collateral to secure a loan from the bank, he may consider borrowing from the moneylender.
4. Credit history: Banks typically check the credit history of borrowers to assess their creditworthiness. If Manav has a poor credit history, he may have difficulty obtaining a loan from the bank. Moneylenders, on the other hand, may be more willing to lend to individuals with poor credit histories, although they may charge higher interest rates to compensate for the increased risk.

Overall, Manav will need to consider a variety of factors, including interest rates, repayment terms, collateral requirements, and credit history, when deciding whether to borrow from the bank or the moneylender.

In India, about 80 percent of farmers are small farmers, who need credit for cultivation

In India, small farmers make up a significant portion of the farming population and often rely on credit to finance their farming activities. This includes borrowing money to purchase seeds, fertilizers, and other inputs, as well as investing in infrastructure and equipment.

However, small farmers may face challenges in obtaining credit due to a lack of collateral or credit history, or because they may be perceived as high-risk borrowers. This can limit their ability to access the financial resources they need to cultivate their land and grow their businesses.

To address this issue, the government of India has implemented a number of initiatives to provide credit to small farmers. This includes schemes such as the Kisan Credit Card, which provides small farmers with access to credit at subsidized interest rates, and the Farmer Producer Organization (FPO) Scheme, which enables small farmers to come together and access credit as a group.

Overall, providing credit to small farmers is important for supporting their farming activities and promoting economic development in rural areas.

Choose the most appropriate answer.

(i) In a SHG most of the decisions regarding savings and loan activities are taken by
(a) Bank.
(b) Members.
(c) Non-government organisation.
Ans: (b) Members.

ii) Formal sources of credit does not include

(a) Banks.

(b) Cooperatives.

(c) Employers.

Ans:(c) Employers

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