Class 10 Economics Ch 3 – Money and Credit

NCERT CLASS 10 ECONOMICS • DETAILED SOLUTIONS • CHAPTER 3 • MONEY AND CREDIT

Money and Credit

Detailed Solutions from Textbook

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💡 Key Terms

Double Coincidence of Wants: Both parties agree to sell and buy each other’s commodities.
Debt Trap: A situation where credit pushes the borrower into a situation from which recovery is very painful.
Collateral: An asset that the borrower owns (land, building, vehicle, etc.) and uses as a guarantee to a lender until the loan is repaid.

Descriptive Questions

Question 1

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 often known as a debt trap.

Example:

A farmer takes a loan for crop production.
If the crop fails due to pests or lack of rain, the farmer is unable to repay the loan.
He may have to sell a part of his land to repay the loan.
Thus, credit instead of helping him improve his earnings, pushes him into a situation from which recovery is very painful.

Question 2

How does money solve the problem of double coincidence of wants? Explain with an example of your own.

Money solves the problem of double coincidence of wants by acting as a medium of exchange. It separates the act of sale and purchase.

Example:
Suppose a shoe manufacturer wants to buy wheat. In a barter system, he would have to find a farmer who not only has wheat but also wants to buy shoes. This is difficult.
With money, the shoe manufacturer can simply sell his shoes for money and then use that money to buy wheat from any farmer. He does not need to find a farmer who wants shoes.

Question 3

How do banks mediate between those who have surplus money and those who need money?

Banks mediate between those who have surplus money (depositors) and those who need money (borrowers) in the following way:

People deposit their surplus money in banks. Banks pay them interest on these deposits.
Banks keep only a small proportion (about 15%) of deposits as cash. The rest is extended as loans to borrowers.
Banks charge a higher interest rate on loans than what they offer on deposits.
The difference between what is charged from borrowers and what is paid to depositors is the bank’s main source of income.

Question 4

Look at a 10 rupee note. What is written on top? Can you explain this statement?

Statement: “Reserve Bank of India” and “Guaranteed by the Central Government”.

Explanation: In India, the Reserve Bank of India (RBI) issues currency notes on behalf of the Central Government. No other individual or organisation is allowed to issue currency. The law legalises the use of rupee as a medium of payment that cannot be refused in settling transactions in India.

Question 5

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

We need to expand formal sources of credit (banks and cooperatives) because:

High Cost of Informal Credit: Informal lenders (moneylenders, traders) charge very high interest rates, which increases the debt burden on the borrower.
Debt Trap: High interest payments mean less income for the borrower, leading to a debt trap.
Development: Cheap and affordable credit is crucial for the country’s development (for businesses, small scale industries, farmers).
Reach: Formal sources need to expand to rural areas so that dependence on informal sources reduces.

Question 6

What is the basic idea behind the SHGs for the poor? Explain in your own words.

The basic idea behind Self Help Groups (SHGs) is to organize rural poor, especially women, into small groups to pool their savings.

A typical SHG has 15-20 members who meet and save regularly.
Members can take small loans from the group itself to meet their needs.
The group charges interest on these loans but it is less than what the moneylender charges.
If the group is regular in savings, it becomes eligible for availing loans from the bank without collateral. This creates self-employment opportunities.

Question 7

What are the reasons why the banks might not be willing to lend to certain borrowers?

Banks might be unwilling to lend because:

Lack of Collateral: Some borrowers do not have any asset (collateral) to guarantee the loan.
Documentation: Borrowers may fail to provide required documents like salary slips or employment proof.
Credit History: Borrowers with a history of non-repayment or bad loans (NPA) are risky.
High Risk: Banks avoid lending to high-risk ventures where chances of repayment are low.

Question 8

In what ways does the Reserve Bank of India supervise the functioning of banks? Why is this necessary?

The RBI supervises banks in the following ways:

Cash Balance: It monitors if banks are maintaining the minimum cash balance.
Lending Practices: It ensures banks lend not just to profit-making businesses but also to small cultivators and small scale industries.
Reports: Banks have to submit periodic reports to RBI on how much they are lending, to whom, and at what interest rate.

Necessity: This is necessary to ensure the stability of the banking system and to prevent banks from collapsing or exploiting customers.

Question 9

Analyse the role of credit for development.

Credit plays a vital role in development:

Business Growth: Affordable credit allows businesses to invest in raw materials and machinery, leading to increased production.
Agriculture: Farmers need credit for seeds, fertilizers, and equipment. Timely credit helps them grow crops reliably.
Small Scale Industries: It helps small industries set up and expand, creating employment.
Standard of Living: It helps people build houses, buy assets, and improve their standard of living.

Question 10

Manav needs a loan to set up a small business. On what basis will Manav decide whether to borrow from the bank or the moneylender? Discuss.

Manav will decide based on the following factors:

Interest Rate: Banks charge much lower interest compared to moneylenders.
Collateral: If Manav has collateral (papers for house/shop), he can approach a bank. If not, he might be forced to go to a moneylender.
Documentation: Banks require paperwork. Moneylenders lend without much documentation but at a high cost.

Ideally, he should choose the bank for cheaper credit to make his business profitable.

Question 11

In India, about 80 per cent of farmers are small farmers, who need credit for cultivation.

(a) Why might banks be unwilling to lend to small farmers?
Banks find it risky to lend to small farmers because of the high risk of crop failure. Also, small farmers often lack proper documentation or collateral.

(b) What are the other sources from which the small farmers can borrow?
Informal sources like moneylenders, agricultural traders, relatives, friends, and landlords.

(c) Explain with an example how terms of credit can be unfavourable for the small farmer.
Example: A farmer borrows from a moneylender at a high interest rate (e.g., 5% per month) without paperwork. If the crop fails, the debt accumulates. He might have to work on the moneylender’s farm for free or sell his land to repay. This leads to a debt trap.

(d) Suggest some ways by which small farmers can get cheap credit.
By forming Self Help Groups (SHGs) and Cooperatives. Expanding the reach of banks in rural areas.

Objective Questions

Question 12

Fill in the blanks:

(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.

Question 13

Choose the most appropriate answer.

(i) In a SHG most of the decisions regarding savings and loan activities are taken by:
Answer: (b) Members

(ii) Formal sources of credit does not include:
Answer: (c) Employers