Students should read Chapter 3 Money and Credit Class 10 Social Science Notes provided below. These notes have been prepared based on the latest syllabus and books issued by NCERT, CBSE and KVS. These important revision notes will be really useful for students to understand the important topics given in the chapter Money and Credit in Class 10 Social Science. We have provided class 10 Social Science notes for all chapters.

Revision Notes Chapter 3 Money and Credit Class 10 Social Science

Chapter 3 Money and Credit is an important chapter in Class 10 Social Science. The following notes will help you to understand and easily learn all important points to help you score more marks.

MONEY AS A MEDIUM OF EXCHANGE:

1. A person holding money can exchange it for any commodity or service that he or she might want.
2. Thus everyone prefers to receive payments in money and then exchange the money for things that they want.
3. Both parties have to agree to sell and buy each other commodities. This is known as a Double coincidence of wants.
4. What a person desires to sell is exactly what the other wishes to buy.
5. In a barter system where goods are directly exchanged without the use of money, the double coincidence of wants is an essential feature.
6. In contrast, in an economy where money is in use, money by providing the crucial intermediate step eliminates the need for double coincidence of wants.
7. Money acts as an intermediate in the exchange process, it is called a medium of exchange. This is known as Barter System.

MODERN FORMS OF MONEY:

1. We have seen that money is something that can act as a medium of exchange in transactions.
2. Before the introduction of coins, a variety of objects was used as money.
3. For example, since the very early ages, Indians used grains and cattle as money.

Currency:

1. Modern forms of money include currency – paper notes and coins.
2. Money is accepted as a medium of exchange because the currency is authorized by the government of the country.
3. In India, the Reserve Bank of India issues currency notes on behalf of the central government.
4. As per Indian law, no other individual or organization is allowed to issue currency.
5. No individual in India can legally refuse a payment made in rupees.

Deposits with Bank:

1. The other form in which people hold money is as deposits with the bank.
2. People deposit money with the banks by the opening a bank account in their name.
3. Banks accept the deposits and also pay an amount as interest on the deposits.
4. People also have the provision to withdraw the money as and when they require.
5. Since the deposits in the accounts can be withdrawn on demand, these deposits are called demand deposits.
6. It is this facility which lends it the essential characteristics of money.
7. You would have heard of payments being made by cheques instead of cash.
8. For payment by cheque, the buyer who has an account with the bank, make out a cheque for a specific amount.
9. 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.
10. The facility of cheque against demand deposits makes it possible to directly settle payments without the use of cash.
11. Since demand deposits are accepted widely as a means of payment, along with currency, they constitute money in the modern economy.
12. But for the banks, there would be no demand and no payments by cheques against these deposits. The modern forms of money – currency and deposits – are closely linked to the working of the modern banking system.

LOAN ACTIVITIES OF BANKS:

1. Banks keep only a small proportion of their deposits as cash with themselves.
2. This is kept as a provision to pay the depositors who might come to withdraw money from the bank on any given day.
3. Since, on any particular day, only some of its many depositors come to withdraw cash, the bank is able to manage with this cash.
4. Banks use the major portion of the deposits to extend loans.
5. There is a huge demand for loans for various economic activities.
6. Banks make use of the deposits to meet the loan requirements of the people.
7. In this way, banks mediate between those who have surplus funds and those who are in need of these funds.
8. Banks charge a higher interest rate on loans than what they offer on deposits.
9. The difference between what is charged from borrowers and what is paid to depositors is their main source of income.

TERMS OF CREDIT:

1. Every loan agreement specifies an interest rate which the borrower must pay to the lender along with the repayment of the principal addition, lenders may demand collateral against the loan.
2. Collateral is an asset that the borrower owns and uses this as a guarantee to a lender until the loan is repaid.
3. The interest rate, collateral and documentation requirement, and the mode of repayment together comprise what is called the terms of credit.

FORMAL SECTOR CREDIT IN INDIA:

1. We have seen that people obtain loans from various sources.
2. The various types of loans can be conveniently grouped as formal sector and informal sector loans.
3. Among the former are loans from banks and cooperatives.
4. The informal lenders include moneylenders, traders, employers, relatives and friends, etc.
5. The Reserve Bank of India supervises the functioning of formal sources of loans.
6. For instance, we have seen that the banks maintain a minimum cash balance out of the deposits they receive.
7. The RBI monitors the banks in actually maintaining a cash balance.
8. Periodically, banks have to submit information to the RBI on how much they are lending, to whom, at what interest rate, etc.
9. There is no organization that supervises the credit activities of lenders in the informal sector.
10. They can lend at whatever interest rate they choose.
11. There is no one to stop them from using unfair means to get their money back.
12. Compared to the formal lenders, most of the informal lenders charge a much higher interest on loans.
13. Thus, the cost to the borrower of informal loans is much higher.
14. The Higher cost of borrowing means a large part of the earnings of the borrowers is used to repay the loans.
15. Cheap and affordable credit is crucial for the country’s development.

Formal and Informal Credit: Who gets what?

1. 85% of the loans taken by poor households in the urban areas are from informal sources.
2. Urban households take only 10% of their loans are from informal sources, while 90% are from formal sources.
3. The rich households are availing cheap credit from informal lender whereas the poor households have to pay a large amount of borrowing.
4. The formal sector still meets only about half of the total credit needs of the rural people.
5. The remaining credit needs are met from informal sources.
6. Thus, it is necessary that banks and cooperatives increase their lending particularly in the rural areas so that the dependence on informal sources of credit reduces.
7. While formal sector loans need to expand, it is also necessary that everyone receives these loans.
8. It is important that the formal credit is distributed more equality so that the poor can benefit from the cheaper loans.

SELF-HELP GROUPS FOR THE POOR:

1. In the previous section, we have seen that poor households are still dependent on informal sources of credit.
2. Banks are not present everywhere in rural India.
3. Even when they are present, getting a loan from a bank is much more difficult than taking a loan from informal sources.
4. The absence of collateral is one of the major resources which prevent the poor from getting the bank loans.
5. Informal lenders such as moneylender, on the other hand. Known the borrowers personally and hence are often willing to give a loan without collateral.
6. However, the moneylenders charge very high rates of interest, keep no records of the transactions and harass the poor borrower.
7. In recent years, people had tried out some newer ways of providing loans to the poor.

Objective Type Questions

Question. Which one of the following is not a limitation of the barter system?
(a) Lack of double coincidence of wants.
(b) Certain products can’t be divided.
(c) Most often double coincidence of wants is not available.
(d) None of the above
Answer : Option (d) is correct.

Question. Banks do not give loans to:
(a) small farmers.
(b) marginal farmers.
(c) industries.
(d) people without proper collateral and documents.
Answer : Option (d) is correct.

Question. A deposit with a bank that can be withdrawn whenever the depositor likes to do so, is termed as:
(a) a demand deposit
(b) a time deposit
(c) a fixed deposit
(d) a legitimate deposit
Answer : Option (a) is correct.

Question. Who issues currency notes in India?
(a) Reserve Bank of India
(b) State Bank of India
(c) Ministry of Finance
(d) Government of India
Answer : Option (a) is correct.

Question. The functioning of the formal source of credit is supervised by:
(a) Government of India
(b) Reserve Bank of India
(c) Ministry of Finance
(d) None of the above
Answer : Option (b) is correct.

Question.

(a) (i)-(c), (ii)-(d), (iii)-(b), (iv)-(a)
(b) (i)-(a), (ii)-(b), (iii)-(c), (iv)-(d)
(c) (i)-(b), (ii)-(a), (iii)-(d), (iv)-(c)
(d) (i)-(d), (ii)-(c), (iii)-(a), (iv)-(b)
Answer : Option (a) is correct.

Question. Analyze the information given below, considering one of the following correct options:
Mohan is an agricultural labourer. There are several months in a year when he has no work and needs credit to meet his daily expenses. He depends upon his employer, the landowner for credit who charges an interest rate of 5 per cent per month. Mohan repays the money by working physically for the landowner on his farmland.
Over the years his debt will –
(a) Increase – because of increasing interest and non-payment of monthly amount.
(b) Remain constant – as he is working for the employer but is repaying less.
(c) Reduce – as amount equivalent to his salary is being counted as monthly repayment.
(d) Be totally repaid – as he is repaying the debt in the form of physical labour.
Answer : Option (a) is correct.

Question. Analyze the information given below, considering one of the following correct options:
A shopkeeper Sudha has to make a payment to the wholesaler and writes a cheque for a specific amount to the wholesaler. The wholesaler takes this cheque and deposits it in his own account in the bank. The money is transferred form one bank account to another bank account in a couple of days. The transaction is completed without any payment of cash.
(a) Check payment
(b) Interest on deposits
(c) Demand deposit
(d) Money transfer
Answer : Option (c) is correct.

Question. Analyze the information given below, considering one of the following correct options:
Ramu is a shoe manufacturer and he wants to directly exchange shoes for rice without the use of money. Now he will have to look for a rice growing farmer who not only wants to sell rice but also wants to buy the shoes in exchange.
(a) Double coincidence of wants
(b) Goods exchange with goods
(c) Goods exchange with money
(d) None of the above
Answer : Option (a) is correct.

Question. Find the incorrect option from the following:
(a) Poor households still depend on informal sources of credit.
(b) RBI supervises the functioning of informal sources of loans.
(c) Banks are not present everywhere in the rural areas.
(d) RBI monitors the banks in actually maintaining cash balance.
Answer : Option (b) is incorrect.

Question. Find the incorrect option from the following:
(a) Demand deposit share the essential features of money.
(b) With demand deposit payments can be made without cash.
(c) Demand deposits are safe way of money transformation.
(d) Demand deposit facility is like cheque.
Answer : Option (d) is incorrect.

Assertion and Reason Based Questions

Question. Assertion (A): Banks keeps a small proportion of their deposits as cash with themselves.
Reason (R): This is kept to meet the loan requirements of the people.
Option:
(a) Both A and R are true and R is the correct explanation of A.
(b) Both A and R are true but R is NOT the correct explanation of A.
(c) A is true but R is false.
(d) A is false and R is true.
Answer : Option (c) is correct.

Question. Assertion (A): Banks charge a higher interest rate on loans than what they offer on deposits.
Reason (R): The difference between what is charged from borrowers and what is paid to depositors is their main source of income.
Option:
(a) Both A and R are true and R is the correct explanation of A.
(b) Both A and R are true but R is NOT the correct explanation of A.
(c) A is true but R is false.
(d) A is false and R is true.
Answer : Option (a) is correct.

Question. Assertion (A): Periodically, banks have to submit information to the Finance Minister on how much they are lending, to whom, at what interest rate, etc.
Reason (R): The Finance Minister monitors the banks in actually maintaining cash balance.
Option:
(a) Both A and R are true and R is the correct explanation of A.
(b) Both A and R are true but R is NOT the correct explanation of A.
(c) A is true but R is false.
(d) A is false and R is true.
Answer : Option (d) is correct.

Very Short Answer Type Questions

Question. Explain the importance of ‘Collateral’.
Answer : Importance of ‘Collateral’:
It is used as a guarantee to a lender until the loan is repaid.

Question. Why one cannot refuse a payment made in rupess in India?
Answer : Because it is authorized by the Government of India.

Question. Give one example each of modern currency and old currency.
Answer : Modern currency – Paper notes/coins, old currency – metallic coins like gold, silver & copper coins.

Question. Who supervises the functioning of formal sources of loan?
Answer : Reserve Bank of India (RBI).

Question. Why do banks or lenders demand collateral against loans?
Answer : Bank or lenders demand collateral against loans as it is used as a guarantee to a lender until the loan is repaid.

Question. Why are most of the poor households deprived from the formal sector of loans?
Answer : Because they cannot fulfil the formalities of the formal sector of loans.

Question. What are the two forms of modern currency?
Answer : Paper notes and coins.

Short Answer Type Questions

Question. Why is it necessary to increase of a large number of banks mainly in rural areas? Explain.
Answer : Increase large number of banks:
(i) To reduce the dependence on informal sector of credit.
(ii) To provide cheaper loans.
(iii) To provide accessibility towards loans for the poor.

Question. Why do we need to expand formal source of credit in India?
Answer : Expand formal sources of credit in India
(i) To save people from the exploitation of Informal sector.
(ii) Formal charge a low interest on loans.
(iii) To save from debt trap.
(iv) It provides cheap and affordable credit.

Question. Why are service conditions of formal sector loans better than informal sector? Explain.
Answer : Formal sector are better than informal sector:
(i) Low interest rate.
(ii) Transparency.
(iii) Supervision by the Reserve Bank of India on the functioning of the formal sector.
(iv) No use of unfair means for getting the money back.

Question. “The credit activities of the informal sector should be discouraged.” Support the statement with arguments.
Answer : Credit activities of the informal sector should be discouraged:
(i) Most loans from informal lenders carry a very high interest rate and do little to increase the income of the borrowers.
(ii) The poor households have to pay a large amount for borrowing.
(iii) 85% of the loans taken by poor households in the urban areas are from informal sources.
(iv) Cheap and affordable credit is crucial for the country’s development.

Question. Dhananjay is a government employee and belongs to a rich household, whereas Raju is a construction worker and comes from a poor rural household. Both are in need and wish to take loan. Create a list of arguments explaining who between the two would successfully be able to arrange money from a formal source. Why?
Answer : Dhananjay will be able to get a loan from a formal source.
Arguments:
• Banks are not present everywhere in rural India.
• Even when they are present, getting a loan from a bank is much more difficult than taking a loan from informal sources.
• Bank loans require proper documents and collateral. Absence of collateral is one of the major reasons which prevents the poor from getting bank loans.
Informal lenders such as moneylenders, on the other hand, know the borrowers personally and hence, are often willing to give a loan without collateral.

Question. Explain any three loan activities of banks in India.
Answer : Loan activities of Banks in India:
(i) Banks use the major portion of the deposits to extend loans.
(ii) Banks make use of the deposits to meet the loan requirements of the people.
(iii) Banks mediate between those who have surplus funds (the depositors) and those who are in need of these funds (the borrowers).
(iv) Banks charge a higher interest rate on loans than what it offers on deposits.

Question. Why is modern currency accepted as a medium of exchange without any use of its own? Find out the reason.
Answer : Modern currency is accepted as a medium of exchange without any use of its own because:
(i) Modern currency is authorised by the government of a country.
(ii) In India, the Reserve Bank of India issues all currency notes on behalf of the central government.
(iii) No other individual or organisation is allowed to issue currency.
(iv) The law legalises the use of rupee as a medium of payment that cannot be refused in settling transactions in India.

Question. Imagine yourself to be XYZ, a member of a women Self Help Group. Analyse the ways through which your group provides loan to the members.
Answer : (i) Self Help Groups pool their savings.
(ii) A typical SHG has 15–20 members, usually belonging to one neighbourhood, who meet and save regularly.
(iii) Saving per member varies from Rs. 25 to Rs. 100 or more, depending on the ability of the people to save.
(iv) Members can take small loans from the group itself to meet their needs.
(v) The group charges interest on these loans but this is still less than what the moneylender charges.
(vi) After a year or two, if the group is regular in savings, it becomes eligible for availing loan from the bank.

Question. “Deposits with the banks are beneficial to the depositors as well as to the nation”. Examine the statement.
Answer : The deposits with banks are beneficial for the individual as well as for the nation:
(i) Banks accept deposit and also pay an amount as interest and in this way people earn money.
(ii) People’s money is safe with banks.
(iii) It is easy for individuals to get credit who have savings and current account in the banks.

Question. Describe the importance of formal sources of credit in the economic development.
Answer : Importance of formal sources of credit in the Economic Development:
(i) Formal sources provide cheap credit.
(ii) Credit at affordable rate is available through formal sources.
(iii) Terms and conditions of credit through formal sources are regulated by government.
(iv) Credit from formal source are favourable.

Long Answer Type Questions

Question. How can the formal sector loans be made beneficial for poor farmers and workers? Suggest any five measures.
Answer : Formal sector loans can be made beneficial for poor farmers and workers in the following ways:
(i) Create awareness to farmers about formal sector loans.
(ii) Process of providing loans should be made easier. It should be simple, fast and timely.
(iii) More number of Nationalized Banks/Cooperative Banks should be opened in the rural sector.
(iv) Banks and cooperatives should increase facility of providing loans so that dependence on informal sources of credit reduces.
(v) The benefits of loans should be extended to poor farmers and small scale industries.
(vi) While formal sector loans need to expand, it is also necessary that everyone receives these loans.

Question. Explain any two features each of formal sector loans and informal sector loans.
Answer : Formal Sector Loans: Include loans from banks and cooperatives. Features of formal sector loans are:
(i) Formal sectors provide cheap and affordable loans and their rate of interest is monitored by Reserve Bank of India.
(ii) Formal sector strictly follows the terms of credit, which include interest rate, collateral, documentation and the mode of repayment.
Informal Sector Loans: Include loans from moneylenders, traders, employers, relatives, friends, etc.
Features of informal sector loans are:
(i) Their credit activities are not governed by any organisation, therefore they charge a higher rate of interest.
(ii) Informal sector loan providers know the borrowers personally, and hence they provide loans on easy terms without collateral and documentation.

Question. Why is it necessary for banks and cooperatives to increase their lending in rural areas? Explain.
Answer : Necessity for the banks and cooperative societies to increase their lending facilities in rural areas:
(i) Dependence on informal sources of credit reduces.
(ii) To provide more loan facilities to rural households.
(iii) To save rural people from exploitation.
(iv) It is important that the formal credit is distributed more equally so that the poor can benefit from the cheaper loans.
(v) The bank and the cooperative societies have to increase the lending facilities to improve the livelihood of the people in the rural areas.

Question. What are demand deposits? Explain any three features of it.
OR
Which type of deposits with the banks are called demand deposits? State some important features of demand deposits.
Answer : People save their money in banks by opening an account. The deposits in the bank accounts can be withdrawn on demand, so these deposits are called demand deposits.
(i) Banks accept the deposits and also pay an interest rate on the deposits. In this way, people’s money is safe with the banks and it also earns interest.
(ii) The facility of cheques against demand deposits makes it possible to directly settle payments without the use of cash. Since, demand deposits are accepted widely as a means of payment, along with currency, they constitute money in the modern economy.
(iii) It is authorised by the government of the country.

Question. How do banks mediate between those who have surplus money and those who need money?
Answer : (i) Banks keep a small proportion of their deposits as cash with themselves.
(ii) Major portion of deposits is used for extending loans.
(iii) The banks mediate between depositors and borrowers in this way.
(iv) They charge high rate of interest on loans than what they offer on deposits.

Question. Why is cheap and affordable credit important for the country’s development? Explain any three reasons.
OR
Why is credit a crucial element in the economic development?
OR
“Cheap and affordable credit is crucial for the country’s development.’’ Explain the statement with five points.
Answer : Importance of cheap and affordable credit for the country’s development:
(i) Cheap and affordable credit would lead to higher income.
(ii) Many people could borrow for a variety of needs
(iii) It encourages people to invest in agriculture, do business and set up small scale industries etc.
(iv) It enables more investment which will lead to the acceleration of economic activities.
(v) Affordable credit would also end the cycle of the debt trap.

Question. How are deposits with the bank beneficial for individual as well as for the nation? Explain with examples.
Answer : The deposits with banks are beneficial for the individual as well as for the nation:
(i) Banks accept deposit and also pay an amount as interest and in this way people earn money.
(ii) People’s money is safe with banks.
(iii) It is easy for individuals to get credit who have savings and current account in the banks.
(iv) Poor people who are engaged in production need credit.
(v) Credit provided by the banks for government projects helps in the development of the nation.
(vi) Banks provide loans for the promotion of International trade.
(vii) Development of infrastructure is undertaken with the loans provided by the banks.

Case Based Questions

I. Read the source given below and answer the questions that follow:

The use of money spans a very large part of our everyday life. Look around you and you would easily be able to identify several transactions involving money in any single day. Can you make a list of these? In many of these transactions, goods are being bought and sold with the use of money.
In some of these transactions, services are being exchanged with money. For some, there might not be any actual transfer of money taking place now but a promise to pay money later. Have you ever wondered why transactions are made in money? The reason is simple. A person holding money can easily exchange it for any commodity or service that he or she might want. Thus, everyone prefers to receive payments in money and then exchange the money for things that they want. Take the case of a shoe manufacturer. He wants to sell shoes in the market and buy wheat. The shoe manufacturer will first exchange shoes that he has produced for money, and then exchange the money for wheat. Imagine how much more difficult it would be if the shoe manufacturer had to directly exchange shoes for wheat without the use of money. He would have to look for a wheat growing farmer who not only wants to sell wheat but also wants to buy the shoes in exchange. That is, both parties have to agree to sell and buy each other’s commodities. This is known as double coincidence of wants. What a person desires to sell is exactly what the other wishes to buy. In a barter system where goods are directly exchanged without the use of money, double coincidence of wants is an essential feature. In contrast, in an economy where money is in use, money by providing the crucial intermediate step eliminates the need for double coincidence of wants. It is no longer necessary for the shoe manufacturer to look for a farmer who will buy his shoes and at the same time sell him wheat. All he has to do is find a buyer for his shoes. Once he has exchanged his shoes for money, he can purchase wheat or any other commodity in the market. Since money acts as an intermediate in the exchange process, it is called a medium of exchange.

Answer the following MCQs by choosing the most appropriate option:

1. Why transactions are made in money?
(a) Money is easy to get.
(b) Money is accepted as a medium of exchange.
(c) Everyone has money reserves in their house.
(d) All of the Above.
Answer : Option (b) is correct.

2. In ____________ both parties have to agree to sell and buy each other’s commodities.
(a) Double Coincidence of wants
(b) Barter System
(c) Bank Regulation
(d) Personal Agreements
Answer : Option (b) is correct.

3. How would had the shoe manufacturer directly exchanged shoes for wheat without the use of money?
(a) Both parties have to agree to sell and buy each other’s commodities.
(b) He compels the farmer to give him wheat on compassionate grounds.
(c) He forces the farmer to take the shoes from him in exchange of wheat.
(d) He approaches the bank authorities.
Answer : Option (a) is correct.

4. Why barter system is no longer practiced?
(a) Considered illegal.
(b) People do not have that much things to exchange.
(c) It is difficult to find two parties that have something they both want to trade.
(d) Government keeps a check on such an activity.
Answer : Option (c) is correct.

II. Read the extract given below and answer the questions that follow:

Bartering is the act of trading one good or service for another without using a medium of exchange such as money. A bartering economy differs from a monetary economy in a variety of ways. When barter was used as an exchange medium, the needs of people were very limited. This trading method doesn’t involve money and it relies solely on exchanging goods and services for other services and goods in return.
The use of money spans a very large part of our everyday life. To understand the usefulness of money, we must consider what the world would be like without money. How would people exchange goods and services? Economies without money typically engage in the barter system. Barter is highly inefficient for trying to coordinate the trades in a modern advanced economy. In an economy without money, an exchange between two people would involve a double coincidence of wants, a situation in which both the parties have to agree to sell and buy each other’s commodities. This is known as double coincidence of wants. What a person desires to sell is exactly what the other wishes to buy. In a barter system where goods are directly exchanged without the use of money, double coincidence of wants is an essential feature.
Another problem with the barter system is that it does not allow us to easily enter into future contracts for purchasing many goods and services. Money solves the problems that the barter system creates. Money serves as a medium of exchange, which means that money acts as an intermediary between the buyer and the seller. Modern forms of money include currency — paper notes and coins. The other form in which people hold money is as deposits with banks.

1. Which of the following can be considered as modern form of Money?
(a) Paper note
(b) Gold Coins
(c) Silver Coins
(d) Copper coins
Answer : Option (a) is correct.

2. Which of the following has an essential feature of double coincidence?
(a) Money system
(b) Barter system
(c) Financial system
(d) Banking system
Answer : Option (b) is correct.

3. In a barter system:
(a) goods are exchanged for money.
(b) goods are exchanged for foreign currency.
(c) goods are exchanged without the use of money.
(d) goods are exchanged on credit.
Answer : Option (c) is correct.

4. Which of the following feature of money acts as an intermediate in the exchange process?
(a) Medium of exchange
(b) Unit of value
(c) Store of value
(d) None of the above
Answer : Option (a) is correct.