Money and Credit
- In situations with high risks, credit might create further problems for the borrower. Explain.
Answer: In situation of high risks, credit often creates further problems for the borrower. To understand this, let us take an example of a marginal farmer who holds a small plot of land. Let us assume that the farmer borrows some money to buy seeds and fertilizers. The harvest which he gets may not be enough to meet his family’s needs. So he never comes in a position to sell the farm produce so that he can repay his loans. If some natural calamity; like flood or drought destroys the crops; it even worsens the situation for him. Finally, there is no other way than to get trapped in the never ending cycle of loans.
- : How does the use of money make it easier to exchange things?
Answer: Unlike the barter system, exchange by using money does not need a double coincidence of wants. Hence, money makes it easier to exchange things. Let us take example of a student who wants to sell his old books and wants to buy a guitar in lieu of that. If he opts for the barter system, he will have to search a person who may be interested in giving off his guitar and in taking old books. But finding such a person can be difficult and time consuming. On the other hand, if the student sells his books and takes money for that, he can easily go to a shop to buy a guitar.
- How do banks mediate between those who have surplus money and those who need money?
Answer: Banks take deposits from different people. People, who have surplus money, maintain a healthy deposit in banks. There are many who may be looking for loan. Such people go to the bank if they want to borrow from the formal sector. The bank provides them loan from the deposit which is lying with the bank. Thus, banks serve as a conduit between those who have surplus money and those who need money.
- Look at a 10 rupee note. What is written on top? Can you explain this statement?
Answer: The following statement is written on the note, “I promise to pay the bearer the sum of ten rupees”. This is followed by the signature of the RBI Governor. This statement shows that the central bank of India has fixed a certain value on the currency note and the value applies to everybody and at everyplace in the country.
- : Why do we need to expand formal sources of credit in India?
Answer: Around 48% credit in India comes through the informal sector. There are many people who do not have access to the formal credit sources. Such people often fall in the hands of moneylenders who resort to all sorts of methods to suppress the poor. To help such people out of the economic mess, it is necessary to reach the formal sources of credit to them. It will also help in improving the socioeconomic conditions in villages and remote areas.
- What is the basic idea behind the SHGs for the poor? Explain in your own words.
Answer: Self Help Groups are made to help those poor who do not have access to the formal sources of credit. There are various reasons for their inability to secure a loan from banks or cooperatives. These people are so poor that they fail the creditworthiness. Moreover, the amount borrowed by them is too small to even recover the cost of administration of loan. Illiteracy and lack of awareness further compounds the problems for them. The SHGs help them in providing micro finance so that they can sustain their livelihood. Moreover, SHGs also facilitate the development of a repayment culture among such people.
- What are the reasons why the banks might not be willing to lend to certain borrowers?
Answer: A bank usually lends to a person who has repayment capacity. Banks avoid lending for a risky venture. These are the reasons, banks might not be willing to lend to certain borrowers.
- : In what ways does the Reserve Bank of India supervise the functioning of banks? Why is this necessary?
Answer: RBI is the central bank of India. It formulates policies for the banking sector in India. Proper rules and regulations are necessary for the banking system because the banks affect the overall economy in a great way. By regulating the functioning of banks, RBI not only keeps a check on the banking and finance but also on the overall economy so that economic crisis does not erupt.
- : Analyse the role of credit for development.
Answer: Credit plays a crucial role in development. For most of the businesses, credit becomes necessary for expansion at some time or the other. Without credit, a small company cannot be changed into a big corporate house. Farmers cannot go for large scale farming in the absence of credit. Majority of people shall never be in a position to buy a house or a car in the absence of loan. Demand of car and houses helps in developing the economy in a significant way.
- 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.
Answer: Manay needs to compare the rates of interest by various lenders. He also needs to compare the demand for collateral and repayment terms and conditions. The creditor who is asking for a low interest rate, less collateral and easier terms of repayment would be the preferable creditor.
- Fill in the blanks:
- Majority of the credit needs of the _________________households are met from informal sources.
Answer:Informal - ___________________costs of borrowing increase the debt-burden.
Answer:Higher - __________________ issues currency notes on behalf of the Central Government.
Answer:RBI - Banks charge a higher interest rate on loans than what they offer on __________.
Answer:Deposits - _______________ is an asset that the borrower owns and uses as a guarantee until the loan is repaid to the lender.
Answer:Collateral - (i) 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 organizations
Ans: Members
(ii) Formal sources of credit does not include
(a) Banks
(b)Cooperatives
(c) Employers
Ans: Cooperatives