Back to: MBOSE Social Science Class 10

In situation with high risks, credit might create further problems for the borrower. Explain

This statement is true”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. If a farmer takes a loan for crop production and the crop fails, loan payment becomes impossible and to repay the loan the farmer has no option but to sell a part of his land which makes his situation worse than before. Since farming is associated with high uncertainty, debt trap is common. Thus, the loan proves to be costlier to the borrower as he ends up losing his assets as well.

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

In a barter system where goods are directly exchanged without the use of Money, double coincidence of wants is an essential feature. By serving as a medium of exchange Money removes the need of double coincidence of wants and the difficulties associated with the barter systems. For example, it is no longer necessary for a farmer to look for a book publisher who will buy his cereals at the same time sell him books. 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 service which he needs. This is because Money acts as a medium of exchange.

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

Usually two types of people come to bank, one those who have surplus money and two , those who need money. Banks act as channels for flow of money between those who have surplus money deposit in the bank, with an assurance that they would receive an interest upon the deposit. Bank keep small portion of such deposits as cash for themselves to pay depositors on demand. The rest of the deposited money is used to extend loans to those who need money.

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

 The following words are written on top of a 10 Rupees note: (on all kinds of Indian paper currency)

Reserve Bank of India, Guarantee by  the central Government of India, I promise to pay the bearer the sum of Ten Rupee

A 10- rupee note is a legal tender and used as a medium of exchange because it  is authorized by the government of India. In India, Reserve Bank of India holds the power to issue currency notes on behalf of the central government. The statement indicates that the currency is authorized or guaranteed by the Central Government. The Indian law has legalized the use of rupee to make payment and cannot be refused in setting transaction in India. As a promise written on a promissory note, the RBI promises the bearer to pay the given sum of money.

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

• To save people from exploitation of informal sector.
• To save people from debt trap.
• It provides cheap and affordable credits.
• To reduce the higher risk associated with informal sources of credit because of the fluctuating terms and conditions.
• The RBI supervises the functioning of formal sources of credit.

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

Absence of collateral is one of the major reasons which prevent the poor from getting bank loans. Self Help Group is a group of people usually belonging to one neighborhood having same social and economic backgrounds. They meet and save money regularly as per their ability. Members of the group can take small loans from the group itself to meet their needs. The group charges interest ( less than money lenders) on these loans. It also aims at increasing school enrollment, improving overall health by providing nutrition and the  use of birth control methods to curb population.  In India, SHGs bridge the gap between high caste and low caste members.

• The main objectives of The SHGs are:
• To organize rural poor into self help groups.
• To collect savings of the members.
• To provide loans without collateral.
• To provide timely loans for a variety of purposes.
• To provide loans at a reasonable rate of interest.
• It also provides platform to discuss and act on variety of social issues such and education, health, nutrition, domestic violence etc.

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

• bank loan required property documents and collateral most of the people do not have required documents which cannot be used as collateral
• the former resource provides loan for production purposes rs common people demand loan for non productive
• many people in rural areas are illiterate that is why they are unable to understand the formalities of formal resource of credit and prefer informal source
• if borrower who have not repair previous loan bank might not be willing to lend them loan for future
• due to poverty Bank not able to trust the borrower to repayment of loan

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

Reserve Bank of India supervises the banks in the following ways.

• It monitors the balance kept by banks for day to d ay transactions.
• It checks that the bank gives loans not just to profit making businesses and traders but also to small borrowers.\Periodically banks have to give details about lending, borrowing and interest rate to RBI. It is necessary for securing public welfare.
• RBI prohibits the bank from running the business with profit motive only. It also keeps a check on interest rate of credit facilities provided by bank. RBI makes sue that the loans from the banks are affordable and cheap.

Analyse the role of credit for development. : Credit is an agreement in which the lenders supply the borrowers with money, goods and services in return for the promise of future payment. Credit has its own role for developments because of the following reasons.

• Cheap and affordable credit lead to higher incomes and many people could then borrow cheaply for a variety of needs.
• With credit people could grow crops, do business, set-up small scale industries etc.
• People could set up new industries or trade as well. All these activities lead to development of the country.

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 whether to borrow from the bank or from the money lender on the basis of the following terms of credit.

• Reasonable rate of interest.
• Collateral security demanded and documentation required by the banker.
• Mode and schedule of repayment of principal and loan. The penalty and repercussions applicable in case of default in repayment.
• Terms of repayment are different of bank and the money lender. Whichever he finds easier he can consider that.

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 might be unwilling to lend small farmers because small farmers usually lack in providing the required documentation for loan processing. Small farmers may also fail to provide collateral security as requested by the banks.

(b) What are the other sources from which the small farmers can borrow: Apart from bank, the small farmers can borrow from local money lenders, agricultural traders, big landlords, cooperatives and SHGs etc. Borrowing from middlemen and moneylenders is not always favourable and they end up in a debt trap.

(c) Explain with an example how the terms of credit can be unfavourable for the small farmer:  Terms of credit include collateral such as land titles, deposits with banks, livestock, building, vehicle, etc which small farmers are not capable of providing. In case of failure of crops, it becomes impossible for farmers to repay the loan. Terms of credit also include documentation requirement. Small farmers are not capable of providing complicated paper work. Thus, the terms of credit can be unfavourable for small farmers.

(d) Suggest some ways by which small farmers can get cheap credit: The small farmers can get cheap credit from the different sources like, Banks, Agricultural cooperatives, regional rural banks and SHGs.