3.2 Text Questions :
Answer the following questions :
1. In situation with high risks, credit might create further problems for the borrowers. Explain.
Ans: Credit helps to increase earnings and therefore, the person is better than before. In another case where there is high risk, credit creates further problems and pushes the person into a debt trap. He is much worse than before.
For example: Crop cultivation involves high costs on inputs such as HYV seeds, fertilizers pesticides, water and so on. Farmers generally take loans at the beginning of the season and repayment the loan after harvest. But the failure of the crop makes loan repayment impossible. So they become much worse than before.
2. How does money solve the problem of the double coincidence of wants? Explain with examples of your own.
Ans: In the barter system where goods are directly exchanged without the use of money, double coincidence of wants is an important feature. But in exchange in an economy where money is in use, money acts in the middle in the exchange process and eliminates the need for double coincidence of wants.
For Example: It is no longer necessary for the farmer to look for a clothes, shelter who will buy his cereals and at the same time sell him clothes for his children. All he has to do is find a buyer for his cereals. If he has exchanged his cereals for money, he can purchase any goods or services he needs.
3. How do banks mediate between those who have surplus money and those who need money?
Ans: Banks accept deposits from people who have extra money and also pay an interest on the deposits. But banks keep only a small proportion (15 % in India) of their deposits as cash with themselves. This is kept as provision to pay the depositors who might come to withdraw money from the bank on any given day. They use the major of the portion of the deposits to extend loans to those who need money.
4. Look at a 10 rupee note. What is written on top? Can you explain this statement?
Ans: ‘Reserve Bank of India’ and ‘Guaranteed by the Central Government’ is written on top. In India, the Reserve Bank of India issues currency notes on behalf of the central government. The statement means that the currency is authorized or guaranteed by the central government. That is, Indian law legalizes the use of rupee as a medium of payment that cannot be refused in setting transactions in India.
5. Why do we need to expand formal sources of credit in India?
Ans: We need to expand formal sources of India for many reasons:
i) Compared to formal lenders, most of the informal lenders charge a much higher interest on loans.
ii) Besides the high interest rate, informal lenders also impose various other conditions.
iii) They do not treat the borrowers well.
iv) The Reserve Bank of India supervisors the functioning of formal sources of loans.
6. What is the basic idea behind the SHG’s for the poor? Explain in your own words.
Ans: The basic idea behind the SHG’s for the poor is to help the rural poor, especially women, into forming small Self Help Groups to collect their savings.
Thus, the main objectives of the SHG’s are:
i) To collect savings of their members.
ii) To collect loans without collateral
iii) To provide timely loans for a variety of purposes.
iv) To provide loans at reasonable rates of interest.
v) Provide a platform to discuss and act on a variety of problems like domestic violence and so on.
7. What are the reasons why the banks might not be willing to lend to certain borrowers?
Ans: The reasons why banks are not willing to lend to certain borrowers are:
i) Banks do not wish to give loans to the poor which have no collateral. Bank loans require proper documents and collateral as security against loans.
ii) Banks might not be willing to lend to the borrowers again, who have not repaid previous loans.
iii) Banks might not be willing to lend those entrepreneur who want to invest in businesses with high risks.
8. In what ways does the Reserve Bank of India supervise the functions of banks? Why it is necessary?
Ans: The Reserve Bank of India supervises the functions of banks in the following ways:
i) Commercial banks are required to hold part of their cash reserves with the RBI. That is, banks maintain a minimum cash balance out of the deposits they receive.
ii) The RBI observes that the banks give loans not just to profit making businesses and traders but also to small cultivators, small scale industries, small borrowers, and so on.
iii) Commercial banks have to submit information to the RBI on how much they are lending, to whom, at what interest rate, and so on. This is necessary to protect, especially, small depositors, farmers, small scale industries, small borrowers, and so on.
Fill in the Blanks:
i) Majority of the credit needs of the __________ households are met from informal sources.
ii) __________ costs of borrowing increase the debt burden.
iii) The __________ issues currency notes on behalf of the Central Government.
iv) Banks charge a higher interest rate on loans than what they offer on _________ .
v) __________ is an asset that the borrower owns and uses as a guarantee until the loan is repaid to the lenders.
Answers
i) Rural ii) High iii) Reserve Bank of India iv) Deposits v) Collateral .
Choose the most appropriate answer :
i) In a SHG most of the decisions regarding savings and loans activities are taken by
a) Bank b) Members c) Non-governmental organization
ii) Formal sources of credit do not include
a) Banks b) Co-operatives c) Employee
Answers :
i) Members ii) Employees .