Money and Credit Flashcards
(18 cards)
In situations with high risks, credit might create further problems for the borrower. Explain.
-In situations with high risks credit might create further problems for the borrower. This is also known as a debt-trap.
-Taking credit involves an interest rate on the loan and if this is not paid back then the borrower is forced to give up his collateral or asset used as the guarantee to the lender.
-Thus in situations with high risks if the risks affect a borrower badly then he ends up losing more than he would have without the loan.
How does money solve the problem of double coincidence of wants? Explain with example.
-A person holding money can easily exchange it for any commodity or service he or she wants.
-Money is generally acceptable by all against their goods i.e. every person is ready to exchange his goods for money and then they can use that money to buy goods and services they want at their time of need.
-So they don’t have to buy the goods they want at the same that they sold their goods or services.
-For example: A farmer can sell his crops for money and he can use this to buy goods or services he needs at his own time. So, this way he doesn’t have to find someone who can give him what he wants and wants exactly what he has to offer.
How do banks mediate between those who have surplus money and those who need money?
-Banks keep 15% of deposits as cash balance for daily withdrawals by depositors.
-A major portion of deposits is used for providing loans to borrowers. The borrows have to pay back the loan along with interest charged by the bank.
-Depositors can withdraw their money on demand and receive interest by the bank.
-Banks charge more interest on the borrowers than what they pay to depositors.
-The difference in interest between what the banks charge on borrowers and what they pay to depositors is their main source of income.
Look at a 10-rupee note. What is written on top? Explain.
-The ten rupee note has Reserve Bank of India written on top of it along with a statement by the central government following it.
-It’s a promissory note that can only be issued by the Reserve Bank of India who supervises all the money-related activities in India.
-The statement on the ten rupee note relates to the idea that the RBI is the central organ in the working of money-related activities.
How do demand deposits have the essential features of money?
-Workers who account in their This amount bank. receive their name and earns some Salary often open deposit their Interest and remains a bank safe with the extra money.
-Since these deposits. Can be These share the withdrawn, these are known as demand essential features of money.
- Demand cheque is deposits a piece of enable the payment by cheque. A paper Instructing the bank to pay a certain amount from the person’s bank account to the person in whose name the cheque has been issued.
Thus demand deposit Currency in the as well modern economy.
Why do we need to expand formal sources of credit in India?
(i) To save people from the exploitation of informal sector.
(ii) Formal institutions 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 businesses and traders.
What is the importance of formal sources of credit in India?
(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 sources are favorable.
Why do banks and cooperative societies need to lend more?
(i) This would lead to higher incomes.
(ii) People could borrow cheaply for a variety of needs,
(iii) They could grow crops and set up small-scale industries, etc.
(iv) Cheap and affordable credit is crucial for the country’s development.
(v)To save and reduce the dependence on informal sources of credit.
(vi) It is important that the formal credit is distributed more equally so that the poor can benefit from the cheaper loans.
Describe the bad effects of informal sources of credit on borrowers?
(i) Higher interest rate.
(ii) Higher cost of borrowing means a larger part of the earnings of the borrowers is used to repay the loan.
(iii) In certain cases, the high interest rate for borrowing can mean that the amount to be repaid is greater than the income of the borrower. (iv) This could lead to increasing debt and debt trap.
(v) Informal sources of credit adversely affect the borrowers as they charge a very high rate which becomes very difficult for the borrowers to pay and ultimately they fall under the debt trap.
(vi) Sometime they have to pay the loan amount and even the interest amount by selling their land and their house and their recovery becomes very painful.
(vii) Our country has witnessed a number of cases in which the borrowers who took loan from an informal source committed suicide in case of unable to repay the debt.
Why is it necessary to increase the number of banks mainly in rural areas?
(i) The cost of informal loans is much higher and often leads to a debt trap. Also, people who might wish to start a new enterprise by borrowing may not do so because of the high cost of borrowing in such a case. (ii) Most loans from informal lenders carry a very high interest rate and make less increase in the income of the borrowers. Thus, it is necessary that banks and cooperatives should increase their lending particularly in the rural areas, so that the dependence of the poor on informal sources of credit reduces.
(iii) It is important that the formal credit sources like banks are distributed more equally in rural and urban areas so that the poor can benefit from the cheaper loans.
How is money transferred from one bank account to another bank account? Explain with an example.
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.
Why is modern currency accepted as a medium of exchange without any use of its own? Find out the reason.
(i)Modern currency is authorized by the government of a country. (ii)In India, Reserve Bank of India issues all currency notes on behalf of the central government. (iii) No other individual or organization is allowed to issue currency.
(iv)The law legalizes 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.
Explain the role of SHGs in rural society.
(i) The idea is to organize rural poor, in particular women, into small Self Help Groups (SHGs) and pool (collect) their savings. (ii) A typical SHG has 15–20 members, usually belonging to one neighborhood, who meet and save regularly. Saving per member varies from Rs 25 to Rs 100 or more, depending on the ability of the people to save.
(iii) Members can take small loans from the group itself to meet their needs. (iv) The group charges interest on these loans but this is still less than what the moneylender charges. (v) After a year or two, if the group is regular in savings, it becomes eligible for availing loan from the bank.
(vi) Loan is sanctioned in the name of the group and is meant to create self-employment opportunities for the members.
(vii) Small loans are provided to the members for releasing mortgaged land, for meeting working capital needs
(viii) Most of the important decisions regarding the savings and loan activities are taken by the group members.
(ix) The group decides as regards the loans to be granted — the purpose, amount, interest to be charged, repayment schedule, etc. Also, it is the group which is responsible for the repayment of the loan.
(x) Any case of non-repayment of a loan by any one member is followed up seriously by other members in the group.
Why is cheap and affordable credit important for the country’s development? Explain any three reasons.
(i) Cheap and affordable credit would lead to higher income.
(ii) Many people could borrow cheaply 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.
How can formal sector loans can be made beneficial for poor farmers and workers?
(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
Describe the vital and positive role of credit with examples.
‘Credit’ refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payment. Credit plays a vital and positive role as : (i) Credit helps people from all walks of life in setting up their business, increase their income and support their families.
(ii) To some people, loan helps a lot in constructing their houses and get relief from monthly rent.
(iii) To others, it helps a lot in raising their standards of living.
(iv) Example of Salim, credit helps him and he is able to increase his earnings.
Disadvantages of taking loans from moneylenders.
(i) Moneylenders give loan on high interest rate. Their recovery process is also ruthless. They charge much higher interest rates than banks.
(ii) Moneylenders keep land as collateral in lieu of giving loan and keep most of the agricultural product as interest of loan.
(iii) There is no uniformity in the interest rates of moneylenders. Taking advantage of the situation and helplessness of the farmers, they suddenly increase the rates of interest.
Distinguish between formal and informal sources of credit.
Formal Sources of Credit-
(i) These cover those sources of credit which are registered by the government. Includes banks and cooperatives.
(ii) Collateral and documentation required
(iii) Charge a lower interest rate
(iv) RBI supervises functioning
(v) They also have social welfare motive apart from profit making.
Informal Sources of Credit-
(i) They include small and scattered units which are out of govt. control. Includes moneylenders, traders, friends, relatives, employers, etc.
