Please refer to below Exam Question for Class 10 Social Science Chapter 3 Money and Credit. These questions and answers have been prepared by expert Class 10 Social Science teachers based on the latest NCERT Book for Class 10 Social Science and examination guidelines issued by CBSE, NCERT, and KVS. We have provided Class 10 Social Science exam questions for all chapters in your textbooks. You will be able to easily learn problems and solutions which are expected to come in the upcoming class tests and exams for standard 10th.

Chapter 3 Money and Credit Class 10 Social Science Exam Question

All questions and answers provided below for Exam Question Class 10 Social Science Chapter 3 Money and Credit are very important and should be revised daily.

Exam Question Class 10 Social Science Chapter 3 Money and Credit

Objective Type Questions

Question. A ______________ is a paper that instructs the bank to pay a specific amount from the payer’s account to the person in whose name is written on it.
(a) Fixed deposit
(b) Demand deposit
(c) Cheque
(d) None of these
Answer : (c) Cheque

Question. Which one of the following options describe ‘Collateral’?
(a) Double coincidence of wants
(b) Certain products for barter
(c) Trade in barter
(d) Asset as guarantee for loan
Answer : (d) Asset as guarantee for loan

Question. Currency notes in India are issued by which of the following?
(a) State Bank of India
(b) Reserve Bank of India
(c) Central Bank of India
(d) None of these
Answer : (b) Reserve Bank of India

Question. Which among the following refers to an agreement that lender supplies the borrower with money, goods or services in return for the promise of future payment?
(a) Credit
(b) Debit
(c) Both (a) and (b)
(d) Interest
Answer : (a) Credit

Question. State whether the following statements are true or false
The SHGs help borrowers overcome the problem of lack of collateral.
Answer: True

Case Based MCQs

Read the following case and answer the questions that follow

Source A Informal Credit Compared to the formal lenders, most of the informal lenders charge a much higher interest on loAnswer : Thus, the cost to the borrower of informal loans is much higher. Higher cost of borrowing means a larger part of the earnings of the borrowers is used to repay the loan.
(i) To what extent, do you agree that credit from informal sector is not good for borrowers?
Answer :Yes, credit from informal sector is not good for the borrowers as the rate of interest charged by the informal lenders is so high that a larger part of income of the borrowers goes to interest payment which results in debt-trap or more poverty. Source B Currency Unlike the things that were used as money earlier, modern currency is not made of precious metal such as gold, silver and copper. And unlike grain and cattle, they are neither of everyday use. The modern currency is without any use of its own.
(ii) Why modern currency is not like the earlier forms of currency like grain or cattle?
Answer : Modern form of currency is unlike earlier forms of currency as Grain and cattle even when they were not used as currency had value of its own. On the other hand, modern currency if not authorised by Reserve Bank of India, becomes an ordinary piece of paper as it has no value of its own. Source C Loan Activities of Bank There is an interesting mechanism at work here. Banks keep only a small proportion of their deposits as cash with themselves. For example, banks in India these days hold about 15 per cent of their deposits as cash.
(iii) In the above lines, which function of the bank is highlighted?
Answer : The function of giving loans is highlighted here. Banks after keeping 15% of their deposits as cash, extend the rest of the deposits to people as loans

Read the case given below and answer the questions that follow.

In India, the Reserve Bank of India issues currency notes on behalf of the Central Government. As per Indian Law, no other individual or organisation is allowed to issue currency. Moreover, the law legalises the use of rupee as a medium of payment that cannot be refused in setting transactions in India. No individual in India can legally refuse a payment made in rupees. Hence, the rupee is widely accepted as a medium of exchange. The other form in which people hold money is as deposits with banks. At a point of time, 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 extra cash at the beginning of the month. What do people do with this extra cash? They deposit it with the banks by opening a bank account in their name. Banks accept the deposits and also pay an amount as interest on the deposits. In this way people’s money is safe with the banks and it earns an amount as interest. People also have the provision to withdraw the money as and when they require. Since the deposits in the bank accounts can be withdrawn on demand, these deposits are called demand deposits.
(i) Why is there a need to legalise rupee as a medium of exchange? What monentary system does India follows?
(ii) Mention two uses of opening a bank account by the people.
(iii) How demand deposits are useful for the banks as well as for the people?
Answer :
(i) There is a need to legalise rupee as a medium of exchange so that all payments can be made and no one can refuse rupee in settling of transactions. India has adopted a representative paper currency or we can say that managed currency standard.
(ii) Two uses of opening a bank account are (a) To deposit surplus cash into the bank account.
(b) To earn interest given by the banks on deposits.
(iii) Demand deposits are useful for the banks as well as for the people in the following ways ! For the banks, demand deposits provide an opportunity to extend them as loans ! For the people, demand deposits are like near money that can be easily withdrawn from the bank.

Read the case given and answer the questions that follow by choosing the correct option.

In recent years, people have tried out some newer ways of providing loans to the poor. The idea is to organise rural poor, in particular women, into small Self Help Groups (SHGs) and pool (collect) their savings. A typical SHG has 15-20 members, usually belonging to one neighbourhood, who meet and save regularly. Saving per member varies from` 25 to ` 100 or more depending on the ability of the people to save. Members can take small loans from the group itself to meet their needs. The group charges interest on these loans but this is still less than what the moneylender charges. After a year or two, if the group is regular in savings, it becomes eligible for availing loan from the bank. Loan is sanctioned in the name; of the group and is meant to create self-employment opportunities for the members. For instance, small loans are provided to the members for releasing mortgaged land, for meeting working capital needs (e.g. buying seeds, fertilisers, raw materials like bamboo and cloth), for housing materials, for acquiring assets like sewing machine, handlooms, cattle, etc.

(i) Fill in the blanks from the given options:
In Self Help Groups, …….. decide the savings and loan activity option.
(a) Reserve Bank of India
(b) Members
(c) Co-operatives
(d) Rural Banks
Answer : (b) In Self Help Groups, group members decide the savings and loan activity options.

(ii) 85% of the loans taken by the poor households in the rural areas are from which of the following sources?
Identify the source from the given options.
(a) Cooperatives
(b) Government Bank
(c) Informal Sources (d) Local bank
Answer : (c) 85% of loans taken by the poor households in rural areas are from informal sources.

(iii) Which of the following aspect is correct regarding the Self Help Groups? Identify the correct option.
(a) They have mainly encouraged rural women to obtain credit.
(b) They have helped women to become self-reliant.
(c) They have helped women to discuss on relevant issues like health.
(d) All of the above
Answer : (d) All the given statements are correct.

(iv) Why Self Help Groups (SHG) are growing in popularity? With reference to the above context, infer the appropriate option.
(a) As they provide loans at a nominal rate of interest.
(b) They create self-employment opportunities for its members.
(c) Both (a) and (b)
(d) As members of SHG’s require collateral to get loANS
Answer : (c) Self Help Groups are growing in popularity as they provide loans as at nominal rate of interest and they create self-employment opportunities for its members.

(v) Assertion (A) Members can take small loans from the group itself to meet their needs through Self-Help Groups.
Reason (R) SHGs are the building blocks of organisation of the rural poor. Codes
(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, but R is true
Answer : (b) Members can take small loans from the group itself to meet their needs as the group charges interest on these loans but this is still less than what the moneylender charges. On the other hand, Self Help Groups are generally considered the building blocks of organisation of the rural poor. Hence, both assertion and reason are true but reason is not the correct explanation of assertion.

(vi) Which is one of the major reasons that prevent the poor from getting bank loans?
Choose the best suitable option :
(a) Absence of collateral
(b) Lack of availability of banks in rural areas
(c) Lack of approach towards formal organisations.
(d) All of the above
Answer : (a) Absence of collateral is the major reason which prevent poor from getting bank loans

Question. Correct and Rewrite Questions
The Self-Help Groups (SHGs) is the group which is not responsible for the repayment of the loan.
Answer : The Self-Help Groups (SHGs) is the group which is responsible for the repayment of the loan.

Question. In the question given below, there are two statements marked as Assertion (A) and Reason (R). Read the statements and choose the correct option:
Assertion (A): Self-Help groups help to reduce the functioning of formal sector of credit.
Reason (R): Informal sector includes moneylenders, traders, etc.
Options:
(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 but R is true.
Answer : (d) A is false but R is true.

Question. Study the given table and find out the appropriate reason for the acceptance of money as a medium of exchange:

(a) It is widely accepted.
(b) It is modern form of money.
(c) It includes notes and coins.
(d) It is issued by RBI.
Answer : (a) It is widely accepted.

Question. Read the given information carefully, and answer the question that follows:

Rita has taken a loan of ₹ 7 lakhs from the bank to purchase a car. The annual interest rate on the loan is 14.5 per cent and the loan is to be repaid in 3 years in monthly installments. The bank retained the papers of the new car as collateral, which will be returned to Rita only when she repays the entire loan with interest.

Analyse the loan information given above, select the correct option.
(a) Mode of re-payment
(b) Terms of credit
(c) Interest on loan
(d) Deposit criteria
Answer : (b) Terms of credit

Very Short Answer Type Questions

Question. What is meant by double coincidence of wants?
Answer : Both parties, the seller and the buyer have to agree to sell and buy each other commodities. Goods are directly exchanged without the use of money.

Question. Why are most of the poor households deprived from the formal sector of loans?
Answer : They are deprived from the formal sector of loans because of:
(i) Lack of collateral.
(ii) They are illiterate.
(iii) They cannot fulfil the formalities of the formal sector of loans.

Question. What is a barter system?
Answer : Barter system is a condition in which goods are exchanged without the use of money.

Question. What are the reasons why the banks might not be willing to lend to certain borrowers?
Answer : The banks might not be willing to lend to certain borrowers because they may not be having any collateral which is used as a guarantee of the repayment of loan.

Question. Why is money called a medium of exchange? Who supervises the functioning of formal sources of loan?
OR
How does money act as medium of exchange?
Answer : Money acts as an intermediate in the exchange process and eliminates the need for double coincidence of wants. As money acts as intermediate, it is also called medium of exchange.

Question. Why is money called a medium of exchange?
Answer : Money acts as an intermediate in the exchange process.

Question. Recognise the situation when both the parties in a barter economy have to agree to sell and buy each other’s commodities. What is it called?
Answer : This is known as double coincidence of wants.

Question. Give any two examples of informal sector of credit.
Answer : Two examples of informal sector of credit are: (i) moneylenders, (ii) traders, (iii) employers, (iv) relatives, (v) friends.

Question. Why do banks ask for collateral while giving loans?
Answer : Banks use collateral as a guarantee until the loan is repaid.

Question. Why one cannot refuse a payment made in rupees in India?
Answer : One cannot refuse a payment made in rupees because it is accepted as a medium of exchange. The currency is authorized by the government of India.

Question. Highlight the inherent problem in double coincidence of wants.
Answer : The inherent problem in double coincidence of wants is that both parties have to agree to sell and buy each other’s commodities.

Question. Explain the reason for necessity of supervision by the Reserve Bank of India of formal source of loans.
Answer : The Reserve Bank of India supervises the functioning of formal sources of loans because banks are giving loans to small cultivators, small scale industries, to small borrowers or not only to profit-making businesses and traders.

Question. Why are the banks willing to lend to self-help groups?
Answer : The banks are willing to lend to the self-help group because they are regular in saving and loan matter is taken very seriously. If any one member is not able to repay the loan then it is followed seriously by other members.

Short Answer Type Questions

Question. How is money used as a medium of exchange? Explain with examples.
Answer : Money is used as a medium of exchange in the following ways ! In day-to-day transactions, goods are being bought and sold with the use of money. ! The transactions are made in money as a person holding money can easily exchange it for any commodity or services. ! Use of money has made it easier to exchange services such as the service of a doctor, teacher etc.

Question. How do demand deposits have the essential features of money? Explain.
Answer : Demand deposits have the essential features of money in the following ways ! Demand deposits can be withdrawn from the bank whenever it is required. ! Demand deposits are widely accepted as a means of payment, along with the currency, thus they are considered as money. ! Demand deposits are also accepted widely as means of payment by way of a cheque instead of cash. 3. Examine any three situations in which credit helps in the development of agriculturists. 
Answer : Three situations in which credit helps in the development of agriculturists are
(i) Farmers can buy farm machinery and equipments along with fertilisers for better crop production by taking cheap loans
(ii) Farmers can buy other agricultural inputs like hybrid seeds, raw materials or undertake irrigational activities in their farms to get better crop yields.
(iii) Farmers can buy farm animals and other livestock to raise their secondary income with the help of credit facilities. 4. Examine any three situations in which credit pushes the borrower into a debt-trap.
Answer : Three situations in which credit pushes the borrower into a debt-trap are
(i) When a borrower sells the agricultural produce to repay a loan but it may not be enough. Then more credit is taken to repay the entire amount which pushes the borrower into debt-trap.
(ii) When borrowers depend on informal sources of credit who charge a high rate of interest. This increases the repayment amount and new loans have to be taken to repay the earlier ones.
(iii) In high risk situations, for example, farmers taking credit before sowing of crops. If harvest fails then fresh loans are taken to repay the existing loans leading to debt-trap.

Question. Explain the three important terms of credit.
Answer : Terms of credit is a set of conditions under which a loan is given. Three important terms of credit are
(i) Collateral A borrower has to offer a collateral to the lender. It is a security to use as a guarantee till the loan is paid such as land title, bank deposits, livestock, house, factory etc. (ii) Rate of Interest It is the proportion of amount at which the lender lends money to the borrower. The rate at which loan is given is decided by the RBI.
(iii) Time Period It is duration of the loan till which the amount will be repayed along with interest.

Question. Why do lenders ask for collateral while lending? Explain.
Answer : The lenders ask for collateral before lending because it is an asset that the borrower owns and uses this as a guarantee to the lender, until the loan is repaid. A collateral is an asset such as land, building, livestock, vehicle or deposits with banks that the borrower owns and uses this as a guarantee to the lender until the loan is repaid. Collateral with the lender acts as a proof that the borrower will return the money. By keeping a collateral with the lender the borrower is bound to be regular in paying the interest because the borrower does not want to lose the collateral. In case of default i.e. borrower is unable to pay the loan, the lender has the right to sell the collateral or use it.

Question. Explain the role of credit for economic development.
Answer : The role of credit for economic development is ! A country’s growth and economic development is greatly dependent on cheap and affordable credit system. Different kinds of economic activities need credit like to set up business for investment purpose, and also buying new house, cars and so on. ! Mostly manufacturing units need a huge amount of money to buy raw materials for their production process. Thus, credit here helps to make such manufacturing works easy. ! Cheap, affordable and fast credit system helps farmers to buy new and advanced technology for agricultural practices, e.g. tractors, threshers, fertilisers, new and advanced seeds (HYVs) and so on.

Question. ‘‘Credit can play a negative role.’’ Justify the statement with arguments.
Answer : Credit can play a negative role in the following ways ! In situations where credit is taken to repay the earlier loans then it will increase the burden of repayment. ! In high risk situations when the future is uncertain, there credit plays a negative role. For example, farmers taking credit before sowing but their harvest may not be good and they may not be able to repay their loans ! Rural borrowers normally depend on informal sources of credit who charge a high rate of interest. This repayment of larger amounts may sometimes be larger then their income. In that case, credit plays a negative role.

Question. Why is cheap and affordable credit important for the country’s development ? Explain any three reasons.
Answer : Cheap and affordable credit is important for the country’s development because (i) More lending would lead to higher income and encourage people to invest in agriculture, engage in business and set up small scale industries.
(ii) Cheap credit will allow weaker sections of society to get rid of the exploitation at the hands of money lenders and come out of debt trap.

(iii) Affordable credit would lead to sustainable economic activity that would allow borrowers to invest in better technology to make their business more competitive. 10. Why are service conditions of formal sector loans better than informal sector ? Explain.
Answer : Service conditions provided by formal sector loans are better than informal sector loans because ! Formal sources of credit provide cheap and affordable credit without any undue exploitation. ! People in rural areas take credit from moneylenders and traders (informal sector) who charge very high rate of interest. ! Informal sector exploit the borrowers leading to debt traps. ! Formal sector is mainly supervised by the Reserve Bank of India. So, every clause is in writing and clear to comprehend. Whereas, no external organisation supervises informal sector. So, there is no such written clause.

Question. Explain any three reasons for the banks and cooperative societies to increase their lending facilities in rural areas.
Answer : Banks and cooperatives are needed to increase their lending facilities in rural areas because (i) People in rural areas take credit from moneylenders and traders who charge very high rate of interest. These people must be aware about the role of banks and cooperatives so that they can be provided by cheap credit facilities. (ii) Rural people are exploited by using unfair means thus, leading them to debt traps. To reduce the dependence of informal sector in rural areas, there is need for setting up of more banks. ! (iii)Formal sources of credit provide cheap and affordable credit in rural areas without any undue exploitation. These formal sources will serve as a building block for rural households. This will help the people to start up their small business or trade in certain goods.

Question. The credit activities of the informal sector should be discouraged.” Support the statement with arguments.
Answer : The credit activities of the informal sector should be discouraged because ! It is seen that around 85% of the loans taken by the poor households in the urban areas are from informal sources. There is no monitoring system that supervises the credit activities of the lenders in the informal sector. ! High cost of borrowing leads to a major share of earnings going into payment of interest on the loan so formal source of credit is needed. ! Sometimes the higher interest rate leads to the requirement to pay more than the earnings, thus falling into a debt trap. To eliminate this, formal sources are needed. ! Borrowers falling into debt-traps discourage more people from borrowing, which ultimately reduces development of the country.

Question. Explain the features of Self Help Groups.
Answer : The features of the Self Help Groups (SHGs) are ! SHGs typically consist of 15-20 members and each member is required to save and pool (collect) in their resources. ! The SHGs are constituted to provide loans to its members at a reasonable rate. ! After a year or two and with regular savings, the group is eligible to take loans from banks. ! SHGs seek loans from banks for its member collectively and meet the needs of buying assets, machinery, raw materials, construction or repair. ! SHGs also meet regularly to discuss and act on various social issues like dowry, domestic violence, child marriage, health, nutrition, etc. !

Question. What is meant by term of credit? What does it include?
Answer : Terms of credit are the requirements need to be satisfied for any credit arrangements. It includes interest rate, collateral, documentation and mode of repayment. However, the terms of credit vary depending upon the nature of lender, borrower and loan.

Question. In what ways does the Reserve Bank of India supervise the functioning of banks? Why is this necessary?
OR
How does the Reserve Bank of India supervise the functioning of banks? Why is this necessary?
Answer : RBI sees that the banks maintain the minimum cash balance or not. It monitors that the loan is not just given to the profit–making businesses and traders but also to the small borrower. It asks the banks to submit information like how much they are lending, to whom they are lending and at what rate of interest, etc.

Question. How will money be easily exchanged itself for goods or services? Give example to explain.
Answer : Money acts as a medium to exchange itself for goods and services: A person holding money can easily exchange it for any commodity or service that he or she might want. Everyone prefers to receive payments in money and exchange the money for things they want.
For example, a shoemaker wants to sell shoes in the market and buy wheat. The shoemaker will first exchange shoes for money and then exchange the money for wheat. If the shoemaker 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 shoe in exchange. Both the parties have to agree to sell and buy each others commodities. This process is very difficult, time consuming and unhealthy.

Question. Describe the bad effects of informal sources of credit on borrowers.
Answer : The bad effects of informal sources of credit on borrowers:
(i) Most of the informal lenders charge a much higher interest on loans. Thus the cost to the borrower of the informal loans is much higher.
(ii) There is no boundaries or restrictions.
(iii) Higher cost of borrowing means a larger part of earning of the borrowers is used to repay the loan and they have less income left for themselves.
(iv) The high rate of interest of borrowing can mean that the amount to be repaid is greater than the income of the borrower and it can lead to increasing debt and debt-trap.
(v) People who might wish to start an enterprise by borrowing may not do so because of the high cost of borrowing.

Question. How does the use of money make it easier to exchange things?
OR
How does money solve the problem of double coincidence of wants? Explain with an example.
Answer : Money acts as an intermediate in the exchange process and eliminates the need for double coincidence of wants. Everyone prefers to receive payments in money and exchange it for whatever they want to buy. If money is used in the exchange process, then in case of the shoe manufacturer all he has to do is find a buyer for his shoes and then he will buy wheat with that money. This is how the use of money makes the exchange process easier.

Question. How do banks mediate between those who are in need of money and those who have surplus money?
OR
How do banks mediate between those who have surplus money and those who need money?
Answer : (i) Banks keep small proportion of their deposit as cash with themselves.
(ii) Major portion of deposit 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. How is money transferred from one bank account to another bank account? Explain with an example.
Answer : Money is transferred from one bank account to another bank account: If a person has to make a payment to his or her friend and writes a cheque for a specific amount, this means that the person instructs his bank to pay this amount to his friend. His friend takes this cheque and deposits it in his account in the bank. This said amount is transferred from one bank account to another bank account.

Question. “Focuses of currency have undergone several changes since early times.” Elucidate.
Answer : (i) Before the introduction of coins, a variety of objects were used as money.
(ii) In the very early ages, Indians used grains and cattle as money.
(iii) Thereafter, came the use of metallic coins – gold, silver, copper coins.
(iv) Modern forms of money include currency like paper notes and coins.
(v) It is accepted as a medium of exchanges because the currency is authorized by the country’s government.
(vi) It is not made of precious metal, it is without any use of its own.

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) This would lead to higher incomes and many people could then borrow cheaply for a variety of needs.
(ii) They could grow crops, do business, set up small scale industries, etc.
(iii) They could set up new industries or trade. All these lead to the country’s development.

Question. Explain any three loan activities of banks in India. 
Answer : (i) Banks keep only a small proportion of their deposits as cash with themselves, as a provision to pay the depositors who might come to withdraw from the bank on any given day.
(ii) They use their major portion of the deposits to extend loans, mediate between those people who have surplus funds (depositors) and those who are in need of those funds (the borrowers).
(iii) They charge higher rate of interest on the loans than what they offer on deposits. The difference between what is charged from borrowers and what is paid to depositors is their main source of income.

Question. Why do we need to expand formal sources of credit in India? Explain.
Answer : Expand formal sources:
(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.
(v) RBI also supervises the formal sector credit through various rules and regulations which ensures that banks give loans to small cultivators, small borrowers, etc. and not just to profit making business and traders.

Question. How do demand deposit have the essential features of money? Explain.
Answer : The demand deposits have the essential features of money because:
(i) Banks accept the deposits and also pay an amount as interest on the deposits.
(ii) People also have the provision to withdraw the money as and when they require.
(iii) People’s money is safe with the banks and it earns an amount as interest.

Question. Analyses the role of credit in development.
Answer : (i) Credit plays an important role in the development process of a country.
(ii) If the credit is taken from the formal sources at low interest rate, then it is easy for the borrowers to complete their work and repay the loan after making profit.
(iii) In this way there will be individual economic development and also it will lead to country’s economic development.

Question. Why do lenders ask for collateral while lending? Give any three reasons.
OR
Why do lenders ask for collateral while lending? Explain.
Answer : The lenders ask for collateral while lending because collateral, means security, is an assest that the borrower owns (such as land, building, vehicle, livestocks, deposits with banks) and uses this as a guarantee to a lender until the loan is repaid. If the borrower fails to repay the loan, the lender has the right to sell the assest or collateral to obtain payment.
Thus, every loan agreement specifies an interest rate which the borrower must pay to the lender along with the repayment of the principal.

Question. How does the Reserve Bank of India supervise the functioning of banks? Why is this necessary?
Answer : Reserve Bank of India (RBI) supervises the banks in the following ways:
(i) It monitors the balance kept by banks for day-to-day transactions.
(ii) It checks that the banks give loans not just to profit-making businesses and traders but also to small borrowers.
(iii) Periodically, banks have to give details about lenders, borrowers and interest rate to RBI. It is necessary for securing public welfare. It avoids the bank to run the business with profit motive only. It also keeps a check on interest rate of credit facilities provided by bank. RBI makes sure that the loans from the banks are affordable and cheap.

Long Answer Type Questions

Question. ‘‘Bank plays an important role in the economic development of the country.’’ Support the statement with examples.
Answer : Bank plays an important role in the economic development of the country in the following ways (i) Bank Accepts the Deposits Bank accepts the deposits and also pay an amount as interest on the deposits. In this way, people’s money is safe with the banks and it earns an amount as interest. People also have the provision to withdraw the money as and when they require. Since the deposits in the bank account can be withdrawn on demand, these deposits are called demand deposits. (ii) Bank Provides Loans Bank keep only a small portion of their deposits as cash with themselves. Banks use the major portion of the deposits to give loans There is a huge demand for loans for various economic activities. Banks make use of the deposits to meet the loan requirements of the people. (iii) Bank Provides Credit A large number of transactions in our day-to-day activities involve credits in some form or the other. Many industries are provided credit by the Banks which further helps in the economic development of the country. This generates more employment and raises income the people.

Question. Which government body supervises the functioning of formal sources of loans in India? Explain its functioning. Or Describe the functions of the Reserve Bank of India.
Or
Describe the significiance of the Reserve Bank of India.
Answer : The Reserve Bank of India (RBI) supervises the functioning of formal sources of loans in India. Functions or significance of Reserve Bank of India are ! The RBI monitors that the banks actually maintain the cash balance and do not give all the deposits as loans ! The RBI ensures that the banks give loans not just to profit-making businesses and rich traders, but also to small cultivators, small scale industries, small borrowers, etc. ! Periodically, banks have to submit information to the RBI on how much they are lending, to whom, etc. ! The rate of interest charged on loans given by the banks is decided by the Reserve bank. ! In this way, the RBI keeps a check on all the activities of banks and checks the flow of credit also.

Question. How can the formal sector loans be made beneficial for poor farmers and workers? Suggest any five measures.
Answer : The measures to make formal sector loan beneficial for poor farmers and workers are (i) The formal sector like banks and cooperatives should lend more to poor people and workers, particularly in rural areas. (ii) The formal sector should provide cheap and affordable credit to the poor people so that repayment is easy. (iii) Formal sector should work out other ways of arranging collateral from the poor people. (iv) By providing linkage between Self Help Groups and banks, formal sector of credit can be increased. (v) There should be more number of cooperatives and banks in rural areas and people should be made aware of their presence.

Question. Mohan works at a construction site in a sub-urban area while Sudhir is a marketing manager in a company. Both want credit to buy a home. Create a list of arguments explaining who has more possibility of getting a home loan from formal sector.
Answer : Sudhir has more possibility of getting a home loan from the formal sector due to the following arguments ! Formal sector consists of banks and cooperatives. Banks require proper documentation and collateral. In the above case, Sudhir will be able to provide the necessary documents like salary slip, employment record and other documents that are needed by the banks. ! Banks also require collateral security which can be provided by Sudhir since his economic condition is better. Even if he is not able to provide collateral security then bank can retain the ownership papers of the house as collateral security. ! Since Sudhir has a regular source of income, he is in a better position to repay the loan amount in future. But Mohan will not be able to provide proper documents or collateral security so he has to depend on informal sector for credit needs.

Question. Name two formal and two informal sources of credit in India. State advantages of formal and informal sources of credit.
Answer : Two formal sources of credit are bank and cooperatives and two informal sources of credit are moneylenders and traders. The advantages of formal sources of credit are ! It provides loans at a fixed rate and terms. ! It gives loans not just to profit-making businesses and traders but also to small cultivators, small-scale industries and small borrowers etc. ! Cost of borrowing is less and hence promote borrowing and more economic growth. ! There is no exploitation as in the case with the informal sectors. The advantages of informal sources of credit are ! There is no external control over the lending practices. ! It is suitable for poor households as they didn’t have to follow a certain kind of procedure which is required in formal sources of credit.

Question. How can the formal sector loans be made beneficial for poor farmers and workers? Suggest any five measures.
OR
Why are formal sources of credit preferred over the informal source of credit? Give three reasons.
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.
(iii) It should be simple, fast and timely.
(iv) More number of nationalised banks/cooperative banks should be opened in rural sector.
(v) Banks and cooperatives should increase facility of providing loans so that dependence on informal sources of credit reduces.
(vi) The benefits of loans should be extended to poor farmers and small scale industries.
(vii) While formal sector loans need to expand, it is also necessary that everyone receives these loans.

Question. How do banks play an important role in the economy of India? Explain.
OR
“Bank plays an important role in the economic development of the country.” Support the statement with examples.
Answer : Banks play an important role in developing the economy of India:
(i) They keep money of the people in its safe custody.
(ii) They give interest on the deposited money to the people.
(iii) They mediate between those who have surplus money and those who are in need of money.
(iv) They provide loan to large number of people at low interest rate.
(v) They promote agricultural and industrial sector by providing loans.
(vi) They also provide funds to different organisations.

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 earns an 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.
(iv) Its demand and supply can be controlled RBI.
(v) In India, the law legalises the use of rupee as a medium of payment that cannot be refused in settling transaction in the country. No individual can legally refuse a payment made in rupees.

Question. Discuss the characteristics of self-help group.
Answer : Characteristics of Self-Help Groups (SHGs):
(i) The function of SHGs is to organise rural poor, particularly women, and pool their savings. This group has 15-20 members, belong to the neighborhood.
(ii) Saving per member varies from ₹25 to ₹100 or more, depending on the economic condition of the member.
(iii) When the group is regular in saving for a year or two, then the group is eligible for getting loan from the bank.
(iv) Bank provides loan in the name of the group and then the SHGs gives loan to its members at very low rate of interest.
(v) Loan is provided to help them to create self-employment opportunities. All the group members together take decision regarding saving and loan activities.
(vi) SHGs helps women in making them financially self-reliant and provides platform to discuss and act on a variety of social issues.

Question. “Deposits with the banks are beneficial to the depositors as well as to the nation”. Examine the statement.
Answer : Banks play an important role in an economy of a country:
(i) They give interest on the money deposited by the people. Thus, they add to the income of the family. Many families survive on the bank interest.
(ii) Banks mediate between those who have surplus money and those who need money.
(iii) Banks provide cheap loans to a large number of people. They promote agriculture by providing loans to the farmers for bringing new farm implements and make better arrangements for the irrigation of their fields.
(iv) Banks boost the industry also by providing cheap loans to industrialists.
(v) They are the backbone of the country’s trade.
(vi) They employ a large number of people and as such they solve the problem of unemployment to a great extent.

Question. Why is it necessary for the banks and cooperative societies to increase their lending facilities in rural areas? Explain.
OR
Why should the banks and cooperative societies provide more loan facilities to the rural households in India? Give four reasons.
Answer : (i) India is an agricultural country so the people in rural areas deserve a special attention. Hence, the banks and cooperative societies should help the needy people in rural areas.
(ii) Mostly, the people in rural areas are illiterate and hence they can be easily cheated by the moneylenders.
(iii) Most loans from informal lenders carry a very high interest rate and do little to increase the income of the borrowers. Hence, it is necessary that banks and cooperatives increase their lending particularly in rural areas, so that the dependence on informal sources of credit reduces.
(iv) Only the banks and cooperative societies can provide loans to the rural household at cheap rates which can easily save them from the clutches of the moneylenders.
(v) Most of the people in urban areas depend upon the rural people for their food requirements, etc. and, their welfare is most important. Hence, the banks and cooperative societies should provide more facilities to the rural households in the matter of advancing loan.

Question. ‘Self Help Groups’ help borrowers to overcome the problem of back of collateral. Examine the statement.
Answer : (i) In a self help group most of the important decisions regarding the savings and loan activities are taken by the group members.
(ii) Group members are well known to each other. They belong to the same society. (iii) Also, it is the group which is responsible for the repayment of the loan.
(iv) Any case of non repayment of loan by any one member is followed up seriously by other members in the group.
(v) Due to this feature, banks are willing to land to the poor women when organised in SHGs, even though they have no collateral as such.
Thus, through the above points, we can easily say that the Self-Help Groups help borrowers to overcome the problem of back of collateral.

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.
(v) No individual in India can legally refuse a payment made in rupees.

Question. Explain the differences between formal and informal sources of credit.
OR
Mention three points of difference between formal sector and informal sector loans.
Answer :

Case Based Questions

Question. Read the source given below and answer the questions by choosing the most appropriate option.

Swapna, a small farmer, grows groundnut on her three acres of land. She takes a loan from the moneylender to meet the expenses of cultivation, hoping that her harvest would help repay the loan. Midway through the season the crop is hit by pests and the crop fails. Though Swapna sprays her crops with expensive pesticides, it makes little difference. She grows over the year into a large amount. Next year, Swapna takes a fresh loan for cultivation. It is a normal crop this year. But he earnings are not enough to cover the old loan. She is caught in debt. She has to sell a part of the land to pay off the debt.

(i) The passage given above relates to which of the following options?
(a) Collateral credit.
(b) Credit recovery is very painful.
(c) Failure of crops.
(d) Credit is somewhere beneficial.
Answer : (b) Credit recovery is very painful.

(ii) According to the passage, Swapna faced which of the following options–
(a) Failure of the crop made loan repayment impossible.
(b) She had to sell part of the land to repay the loan.
(c) Credit left her worse off.
(d) All of the above
Answer : (d) All of the above

(iii) It refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payment. What is it called?
Answer : Credit

(iv) What example does the passage give?
Answer : Debt trap