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Note On Money And Credit

Home > Study Notes > Note On Money And Credit
Published in: Economics
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Economics Chapter 3 Class 10 CBSE

Rami M / Dubai

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  1. MONEY AND CREDIT (Notes) Barter System: The system of direct exchange in which commodities are exchanged for some other commodity without using any medium of exchange. Money: Money acts as an intermediate in the exchange process & it is called medium of exchange. In many of our day to day transactions, goods are being bought & sold with the use of money. The reason as to why transactions are made in money is that, a person holding money can easily exchange it for any commodity or service that he or she wants. Double coincidence of wants: When in the exchange, both parties agree to sell and buy each others commodities it is called double coincidence of wants. In the barter system double coincidence of wants is an essential feature. Demand Deposits in Bank: Deposits in the bank account that can be withdrawn on demand. People need only some currency for their day to day needs. For instance workers who receive their salaries at the end of each month, have some extra cash. They deposit it with the banks by opening a bank account in their name. Bank accept the deposits and also pay an interest rate on the deposits. Cheque: Paper instructing the bank to pay a specific amount from a person's account to the person in whose name the cheque is drawn. Reserve Bank of India: It is the central bank of India which controls the monetary policy of the country.
  2. Reserve Bank of India supervises the activities of formal sector and keep the track of their activities but there is no one supervise the functioning of informal sector. Periodically banks have to submit information to the RBI on how much they are lending and to whom, at what interest rate, etc. Credit: The activity of borrowing and lending money between two parties. Collateral: Collateral is an asset that the borrower owns (such as land, building, vehicle, livestock, deposits with banks) and uses this as a guarantee to a lender until the loan is repaid. Property such as land titles, deposits with banks, livestock are some common examples of collateral used for borrowing. Terms of Credit: 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. Formal sector: Includes banks & cooperatives; RBI supervises the functioning of formal sources of loans. To see that the bank maintains a minimum cash balance and monitors that these banks give loans not just to profit-making business and traders but also to small cultivators , small scale industries , to small borrowers etc. periodically banks have to submit information to RBI of their activities. Informal sector: Includes money lenders, traders, employers, relatives & friends etc. There is no one to supervise their credit activities. They can charge whatever rate of interest. There is no one to stop them from using unfair means to get their money back.
  3. Self Help Groups (SHG): A typical SHG has 15-20 members usually belonging to a neighborhood, who meet and save regularly. Saving per month varies from 25-100 rupees or more depending upon the ability of the people. Members take small loans from group itself to meet their needs. Question 1. The currency notes on behalf of the Central Government are issued by whom? (2011 D) Answer: Reserve Bank of India. Question 2. Why do banks ask for collateral while giving credit to a borrower? (2014 D, 2011 OD) 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? (2012 D) Answer: Banks use a major portion of deposits to extend loans to people. Question 4. What comprises 'terms of credit'? (2012 OD) Answer:
  4. 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? (2013 D) 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? (2013 OD) 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? (2014 OD) 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'? (2015 D) 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.
  5. 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 the meaning of 'investment'? (2015 D) Answer: Investment is buying of an asset in the form of a factory, a machine, land and building, etc. (physical assets) or shares (monetary assets) for the purpose of making or sharing profits of the enterprises concerned. Common investments are—buying land, factories, machines for faster production, buying small local companies to expand production, cheap labour, skilled engineers, IT personnel, etc. Question 10. What is meant by double coincidence of wants? (2015 OD) Answer: Double coincidence of wants means when both parties have agreed to sell and buy each other's commodities. Question 11. How does money act as a medium of exchange? (2015 OD) 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 12. How do the deposits with banks become their source of income? (2016 D) Answer:
  6. Banks charge a higher interest rate on loans they extend than what they offer on deposits. The difference of interest is the main source of income of banks. Question 13. Why one cannot refuse a payment made in rupees in India? (2016 D) Answer: One cannot refuse a payment made in rupees in India because it is accepted as a medium of exchange. The currency is authorized by the government of the country. Question 14. Compare formal sector loans with informal sector of loans regarding interest only. (2016 D) Answer: Most of the informal lenders charge a much higher interest on loans than the formal sector loAnswer: Question 15. Why is the supervision of the functioning of formal sources of loans necessary? (2016 OD) Answer: Supervision of the functioning of formal sources of loans is necessary because banks have to submit information to the RBI on how much they are lending, to whom they are lending and at what interest rate etc. Question 16. Prove with an argument that there is a great need to expand formal sources of credit in rural India. (2016 OD) Answer: There is great need to expand formal sources of credit in rural India because: 1. There is no organisation that supervises the credit activities of lenders in the informal sector. They lend at whatever interest rate they choose.
  7. 2. No one can stop rural money-lenders from using unfair means to get their money back. Question 17. Why are most of the poor households deprived from the formal sector of loans? (2016 OD) Answer: Most of the poor households are deprived from the formal sector loans because of lack of proper documents and absence of collateral. Question 18. What do you understand by demand deposits? Answer: To ensure safety of their money, people deposit their money with banks. Banks accept deposits and pay interest on deposits. People have the provision to withdraw their money as and when they require. Since money can be withdrawn on demand, these deposits are known as demand deposits. Features: 1. A demand deposit has the essential characteristic of money. It can be used as a medium of exchange. 2. The facility of cheques against demand deposits makes it possible to make payments, without using cash. 3. Since demand deposits are accepted widely as a means of payment along with currency, they constitute money in the modem economy. Question 19. Which country has successfully organized SHGs? Who had initiated the programme? Answer: Bangladesh has successfully organized SHGs. Grameen Bank of Bangladesh is the biggest success story in reaching the poor to meet their credit needs at reasonable
  8. rates. Grameen Bank has now over 6 million borrowers in 40,000 villages across Bangladesh. Most of the borrowers are women and belong to the poorest section of society. This idea is the brain child of Prof. Mohammad Yunus, recipient of 2006 Nobel Prize for Peace. Question 20. Highlight the inherent problem in double coincidence of wants. (2017 D) Answer: Double coincidence of wants means that when someone wants to exchange his goods with another person, the latter must also be willing to exchange his goods with the first person. It can only work when both the persons are ready to exchange each other's goods. Question 21. What is collateral? Why do lenders ask for collateral while lending? Explain. (2012) 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 to recover the loan money. Most lenders ask for collateral while lending as a security against their own funds.

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