Class 10 NCERT Solutions Economics Chapter 3 - Money and Credit

While credit may help the borrower in initiating his/her business or work, at times in situation of high risk, it may create further problems for the borrower. When the borrower is not able to pay the interest on the loan he/she has taken, the interest keeps on mounting which eventually becomes a huge sum. This pushes the borrower into a debt trap. The borrower, in such a case, has to sell a part of his/her property to repay the loan.

Double coincidence of wants is an important feature of the barter system. In barter system, a seller needs to find a buyer who can purchase a commodity and vice versa. This condition is extremely difficult to fulfil.

The introduction of money resulted in the end of the barter system where goods were exchanged according to the needs. Now, money acts as an intermediate in the exchange process, and thus, it is known as a medium of exchange. Anyone can exchange there goods for money and buy commodities that are required by them.

For example, a fruit seller wants to sell his fruits in order to buy wheat. In the absence of money, he will have to look for some person who wants to sell wheat and buy fruits. This is not easy and always possible. However, in case of availability of money as a medium of exchange, the fruit seller just has to find a buyer for her fruits. Once fruits are exchanged for money, she can purchase wheat from the market.  

By allowing the people to open an account, bank act as a mediator between people who have surplus money and people who need money. People, who have surplus cash, deposit their money in a bank. The latter pays a fixed amount of interest on the savings. This surplus money deposited by the people is given in the form of loan to the people who need money. Banks charge a particular rate of interest to those it grants loan. 

’Reserve Bank of India’ along with a statement, “guaranteed by the Central Government” is written at the top of a ten rupee note. This statement implies  the fact that the Reserve Bank of India issue currency on behalf of the Central Government. No other person or organisation apart from the RBI has the right to issue money. 

We need to expand the formal source of credit in India, as in rural areas the informal source of credit such as money lenders charge exorbitant rate of interest from the people. In such a situation, a borrower is usually caught in a debt trap. The formal sources of credit provide loans to  people at a cheaper rate of interests which benefits the farmers and small self-employed people. 

A SHG (Self-help Group) is a group of 15-20 members based in  rural areas who pool their savings together to provide loans to their own members. The loan is provided with much lower interest rates than charged by the local money lenders.

If the SHG’s become regular in their savings, they are provided bank loans.  This helps in creating opportunities for self-employment for the members. The members can get loans from the group without having to arrange any collateral. 

Therefore, the basic idea of SHG is to provide easy loans at low rate of interest to the members, and thus, making them self-sufficient (especially women).

Banks might not provide loans to certain borrowers because of  the following reasons:

1. People with lack of collateral such as house, livestock or any other property as a guarantee.
2. Lack of permanent job
3. Low credentials of the person on previously taken loans.

The Reserve Bank of India supervises the functioning of banks in the following ways:

1. The RBI checks if the banks are maintaining the required amount of cash deposits.
2. To see to it that the banks are also providing loans to small farmers, self-employed people and not just to big business houses.
3.  RBI seeks information from the banks on the total amount they lend during the year and the rate of interest that is charged on to the customers.

Such a supervision and monitoring is necessary to ensure that the banks maintain required liquidity and follows the right procedures of borrowing and lending the money. The inability of the banks to work in accordance with the laid guidelines may result in the loss of money of small and medium investors and may result in financial instability of the country.

Credit plays an important role in the development of an economy. India is primarily an agricultural country.  The timely advancing of credit to the farmers at low rate of interest helps the farmers in increasing their production. In urban areas, the provision of credit to small business units can help them to prosper. Banks also provide loans to various builders for their development projects.

However, it has to be kept in mind that credit should be advanced at cheap rates with fair practices and principles. Credit at extremely high rate of interest may also ruin the borrowers by pushing them into debt trap. 

If Manav has collateral for the bank, then he will prefer to take a loan from the bank. However, if he lacks collateral then he may have to borrow money from the money lenders.

If Manav wants credit at cheap rates, he will consider borrowing the amount from the bank. However, if he lives in a village where there are no credit societies or rural banks, he might take loan from the moneylender. 

(a) Banks might be unwilling to lend money to the farmers in case of absence of collateral with the farmers.

(b) Other sources of credit from where small farmers can borrow are money lenders, friends, relatives, neighbours and traders.

(c) When a farmer is charged with a high rate of interest and she/he will not be able to repay the loan. Sometimes during famine, floods or bad harvest, she/he may be forced to sell a part of her/his land. Under such circumstances, terms of credit may become unfavourable for her/him.

(d) By becoming a part of Self-help Group and by taking a loan from the credit societies, a farmer can get cheap credit.

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

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

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

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

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

(i) Members

(ii) Employers