NCERT Solutions for Class 10

Social Science (Economics)

Chapter 3 – Money and Credit

1. In situations with high risks, credit might create further problems for the
borrower. Explain.
Ans: In situations with high risks, credit might create further problems for the
borrower, also known as a debt-trap. Taking credit involves an interest rate on the
loan, in case if this is not paid back on time, then the borrower is forced to give
up his asset used as the guarantee, to the lender while taking loan. If a farmer
takes a loan for crop production and it fails to produce crops, then the loan
payment becomes impossible. To repay the loan, the farmer will have to sell a
part of his land making the situation quite worse than before. Hence, a situation
with high risks, if the risks is affecting a borrower badly, then he will end up
losing more in financial terms, than he would have without the loan.

2. How does money solve the problem of double coincidence of wants?

Explain with an example of your own.
Ans: In a barter system, where goods are exchanged directly without the use of
money, double coincidence of wants is an important and essential feature. Money
Serves as a medium of exchange, it also removes the need for double coincidence
of wants and the difficulties associated with the barter system. For example, now
it is not necessary for a farmer to search for a book publisher who will buy his
cereals and at the same time sell him books. Now, he has to find a buyer for his
cereals. Farmers now can exchange their cereals for money, and can purchase any
goods or services which they need.

3. How do banks mediate between those who have surplus money and those
who need money?
Ans: Banks keep a small portion of deposits informed of cash (15%) for
themselves, to pay the depositors on demand. Banks use the major portion of
these deposits to give loans to those people who need money. In this way banks
mediate between those who have surplus money and those who need money.

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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.
In India, the Reserve Bank of India (RBI) issues currency in the country on behalf
of the central government. This statement means that the currency is authorized
and guaranteed by the Central Government. Law legalizes the use of rupee in
India as a medium of payment, which cannot be refused in setting transactions in
India.

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

Ans: We need to expand formal sources of credit in India because:
To reduce dependency on informal sources of credit because the latter charge
high interest rates also, they do not benefit the borrower much.
• Affordable and cheap credit is essential for a country's development.
• Co-operatives and banks need to increase their lending especially in rural
areas.

6. What is the basic idea behind the SHGs for the poor? Explain in your own
words.
Ans: The basic objective behind the SHGs is to provide financial resources to the
poor people by organizing the rural poor, particularly women, into small Self-
Help Groups. They even provide loans at a reasonable rate of interest without
collateral.
The main objectives of the SHGs are:
● To organize rural poor people particularly women into small Self-Help
Groups.
● To collect the savings of their members.
● To provide loans without collateral.
● To provide timely loans for various purposes.
● To provide loans at responsible interest rates and easy terms.
● Provide a platform to discuss on various issues and act on a variety of social
issues like education, health, nutrition, domestic violence etc.

7. What are the reasons why the banks might not be willing to lend to certain
borrowers?
Ans: The banks may not lend certain borrowers due to the following reasons:

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 ● Banks require some necessary documents and collateral as security against
loans, some persons fail to meet these requirements.
● The borrowers who did not repay their previous loans, the banks do not
lend them further.
● The banks may not be willing to lend loans to those entrepreneurs who are
going to invest in their business with high risks.
● One of the main objectives of a bank is to earn more profits. For this
purpose, they adopt judicious loan and investment policies which
guarantee fair and stable return on the funds.

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 all the functions of banks in several
ways:
● The commercial banks need to hold a part of their cash, as a reserve with
their RBI. RBI ensures that the banks maintain a minimum cash balance
limit, from the deposits they receive.
● RBI observes and ensures that the banks are giving loans not only to profit
making businesses owners and traders, also to small industries, small scale
cultivators, small borrowers etc.
● The commercial banks need to submit complete information, regarding
how much they are lending, to whom, and at what interest rate etc.to the
RBI.
It is required to ensure equality in the economy of the country, protect especially
small depositors, farmers, small scale industries, small borrowers etc. In this
process, RBI acts as the lender to the last resort to the banks.

9. Analyse the role of credit for development.

Ans: Affordable and Cheap credit is important, it plays a crucial role in the
country’s development. Many of us, including businessman, common people,
borrow money, so there is a huge demand for loans to carry-out various economic
activities. The credit helps us to fulfil the expenses required for their production
which further develop their business. Now, Farmers can grow crops, businessmen
can do their business, set up industries etc.

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.

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Ans: On the basis of the following terms of credit, Manav will decide whether to
borrow from the bank or the money lender:
● How cheap is the rate of interest the bank is giving on loan?
● Documentation required by the banker and requirements for the
availability of collateral.
● How flexible is the EMI option, that is, direct cash or account transfer?
● Depending on these factors, Manav has to decide whether to borrow money
from the bank or the moneylender.

11. In India, about 80 percent of farmers are small farmers, who need credit
for cultivation.
(a) Why might banks be unwilling to lend to small farmers?
Ans: Farmers, at times they fail to repay the loan amount on time, because of the
uncertainty of the crop. Hence, banks may not be willing to lend to small farmers.

(b) What are the other sources from which the small farmers can borrow?
Ans: After banks, the small farmers may borrow money from local money
lenders, agricultural traders, cooperatives, big landlords, SHGs etc.

(c) Explain with an example how the terms of credit can be unfavourable for
the small farmer.
Ans: The terms of credit can be unfavourable for the small farmer – For example:
Ram, a small farmer borrows money from a local moneylender at 3% to grow
rice. But unfortunately, the crop is hit by drought and it fails. As a result, Ram
has to sell a part of his land to repay the loan. Now, the condition becomes quite
worse than before.

(d) Suggest some ways by which small farmers can get cheap credit.
Ans: The small farmers can get a credit at low interest rate from different sources
like – Banks, Agricultural Cooperatives, and SHGs.

12. Fill in the blanks:

(i) Majority of the credit needs of the _______ households are met from
informal sources.
Ans: poor

(ii) ________ costs of borrowing increase the debt-burden.

Ans: high
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(iii) ________ issues currency notes on behalf of the Central Government.
Ans: Reserve Bank of India

(iv) Banks charge a higher interest rate on loans than what they offer on
_________.
Ans: deposits

(v) ________is an asset that the borrower owns and uses as a guarantee until
the loan is repaid to the lender.
Ans: Collateral

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: Option (b) Members.

(ii) Formal sources of credit does not include

(a) Banks.
(b) Cooperatives.
(c) Employers.
Ans: Option (c) Employers

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