MONEY AND CREDIT - Q&A

1. How does the use of money make it easier to exchange things?

Money acts as a medium of exchange, eliminating the need for a double coincidence of wants. In a barter system, if a shoe manufacturer wants wheat, he must find a farmer who wants shoes. With money, the shoe manufacturer can simply sell his shoes for money and then use that money to buy wheat. This intermediate step makes the exchange process much faster and easier.

2. Can you think of some examples of goods / services being exchanged or wages being paid through barter?
Yes, examples include:
1. In rural areas, farm labourers are sometimes paid in food grains (like rice or wheat) instead of cash for their daily work.
2. Residents in a village might exchange milk for vegetables with their neighbours.
3. Historically, the "Jajmani system" in India involved artisans (like barbers or carpenters) providing services to landlords in exchange for a share of the harvest.

1. M. Salim wants to withdraw Rs 20,000 in cash for making payments. How would he write a cheque to withdraw money?
To withdraw cash for himself using a cheque, M. Salim would:
1. Write "Self" in the "Pay" line.
2. Write "Twenty Thousand only" in words.
3. Write "20,000/-" in the number box.
4. Sign the cheque at the bottom.

2. Tick the correct answer.
After the transaction between Salim and Prem,
(i) Salim's balance in his bank account increases, and Prem's balance increases.
(ii) Salim's balance in his bank account decreases and Prem's balance increases.
(iii) Salim's balance in his bank account increases and Prem's balance decreases.
(ii) Salim's balance in his bank account decreases and Prem's balance increases.
(Explanation: Salim issued the cheque to pay Prem, so money goes out of Salim's account and into Prem's account.)

3. Why are demand deposits considered as money?
Demand deposits are considered money because:
1. They can be withdrawn on demand (whenever required).
2. They are widely accepted as a means of payment through the use of cheques, settling transactions without the use of cash.
3. They possess the essential characteristic of money, which is acting as a medium of exchange.

1. Fill the following table.

2. Supposing Salim continues to get orders from traders. What would be his position after 6 years?
If Salim continues to get orders and uses credit wisely, after 6 years he would likely be financially well-off. He could expand his business, perhaps build his own factory, employ more workers, and become a substantial manufacturer. Credit would have played a "vital and positive role" in his development.

3. What are the reasons that make Swapna's situation so risky? Discuss factors: pesticides; role of moneylenders; climate.
Swapna's situation is risky due to:
1. Climate/Nature: Agriculture depends on nature. Irregular rainfall or pests can destroy crops, as happened in her case.
2. Pesticides: While she spent money on expensive pesticides, they were not effective enough to save the crop, adding to her costs without guaranteed returns.
3. Role of Moneylenders: Moneylenders in rural areas often charge very high interest rates. If the crop fails, the interest accumulates rapidly, making the debt burden so huge that the borrower has to sell assets (land) to repay it, leading to a debt trap.

Fill the following details of Megha's housing loan.
Loan amount (in Rupees): 5 Lakhs
Duration of loan: 10 Years
Documents required: Employment records and Salary slips (showing income sources)
Interest rate: 12% per annum
Mode of repayment: Monthly instalments
Collateral: Papers of the new house

1. Why do lenders ask for collateral while lending?
Lenders ask for collateral as a security against the loan. It acts as a guarantee that the borrower will repay the money. If the borrower fails to repay the loan, the lender has the legal right to sell the collateral (asset) to recover the loan amount.

2. Given that a large number of people in our country are poor, does it in any way affect their capacity to borrow?
Yes, it significantly affects their capacity to borrow, especially from formal sources like banks. Poor people often lack assets (like land or a house) to offer as collateral, and they may not have proper documents showing regular income. Since banks require collateral and documentation, the poor are often excluded from formal credit and are forced to rely on informal moneylenders who charge high interest rates.

3. Fill in the blanks choosing the correct option from the brackets.
While taking a loan, borrowers look for easy terms of credit. This means low (low/high) interest rate, easy (easy/tough) conditions for repayment, and less (less/more) collateral and documentation requirements.

1. List the various sources of credit in Sonpur.
Based on the text, the sources of credit in Sonpur are:
1. Village Moneylender.
2. Agricultural Traders.
3. Commercial Banks.
4. Landowner-Employers.
5. Cooperative Societies (Krishak Cooperative).

2. Underline the various uses of credit in Sonpur in the above passages.
The uses of credit mentioned are:
- Loans for cultivation (buying farm inputs).
- Purchase of agricultural implements.
- Agricultural trade.
- Fishery loans.
- Construction of houses.
- Meeting daily expenses during lean months.
- Expenses on sudden illnesses or family functions.

3. Compare the terms of credit for the small farmer, the medium farmer and the landless agricultural worker in Sonpur.
1. Small Farmer (Shyamal): High interest (60% p.a. from moneylender or 36% p.a. from trader). Has to promise to sell crop to the trader at a lower price. Terms are tough.
2. Medium Farmer (Arun): Low interest (8.5% p.a. from bank). Flexible repayment (next 3 years). Can get fresh loans against cold storage receipts. Terms are favorable.
3. Landless Worker (Rama): High interest (60% p.a. from employer). Repayment by working for the landowner. Faces harassment and is often in a debt trap. Terms are exploitative.

4. Why will Arun have a higher income from cultivation compared to Shyamal?
Arun will have a higher income because:
1. Lower Interest Cost: He pays only 8.5% interest to the bank, while Shyamal pays 36-60% to informal lenders.
2. Better Selling Price: Shyamal is forced to sell his crop to the trader at a low price immediately after harvest. Arun can store his potatoes in cold storage and sell them later when market prices are higher.

5. Can everyone in Sonpur get credit at a cheap rate? Who are the people who can?
No, not everyone can get credit at a cheap rate. Only people with assets (land) and proper documentation, like Arun (medium landowners) and members of Cooperative Societies, can access cheap credit from banks and cooperatives. The poor and landless labourers (like Rama) cannot.

6. Tick the correct answer.
(i) Over the years, Rama's debt
- will rise.
- will remain constant.
- will decline.
- will rise. (Because she often takes fresh loans before repaying the old ones).
(ii) Arun is one of the few people in Sonpur to take a bank loan because
- other people in the village prefer to borrow from the moneylenders.
- banks demand collateral which everyone cannot provide.
- interest rate on bank loans is same as the interest rate charged by the traders.
- banks demand collateral which everyone cannot provide.

7. Talk to some people to find out the credit arrangements that exist in your area. Record your conversation. Note the differences in the terms of credit across people.
(Student Activity - Sample Answer)
I spoke to a shopkeeper and a domestic helper.
Shopkeeper: Borrowed from a bank for shop renovation. Interest rate 11% p.a. Provided shop papers as collateral. Repayment via monthly EMI.
Domestic Helper: Borrowed from a local moneylender for daughter's wedding. Interest rate 5% per month (60% p.a.). No collateral, but jewelry kept as security.
Difference: The shopkeeper accessed formal credit with low interest, while the helper had to rely on informal credit with extremely high interest.

1. What are the differences between formal and informal sources of credit?
Formal Sources:
- Includes Banks and Cooperatives.
- Supervised by the RBI.
- Charge lower, reasonable interest rates.
- Require collateral and documentation.
Informal Sources:
- Includes moneylenders, traders, relatives, friends.
- No supervision by any organization.
- Charge very high and unfair interest rates.
- Often do not require collateral but may use unfair means for recovery.

2. Why should credit at reasonable rates be available for all?
Credit at reasonable rates should be available for all because:
1. High interest rates from informal sources take away most of the borrower's income, leaving them with little or trapping them in debt.
2. Affordable credit allows people to start businesses, grow crops, or set up small industries, contributing to the country's economic development.
3. It promotes equity and helps the poor improve their standard of living.

3. Should there be a supervisor, such as the Reserve Bank of India, that looks into the loan activities of informal lenders? Why would its task be quite difficult?
Yes, there should ideally be a supervisor to prevent the exploitation of poor borrowers by informal lenders who charge usurious interest rates.
Why it is difficult: Informal lending happens between individuals (friends, relatives, moneylenders) in a very scattered and unrecorded manner. There are no official records of these transactions, making it almost impossible for a central authority to monitor or regulate them effectively.

4. Why do you think that the share of formal sector credit is higher for the richer households compared to the poorer households?
The share is higher for richer households because:
1. Collateral: Rich households have assets (land, buildings) to offer as security, which banks require.
2. Documentation: They have proper documents regarding income and employment.
3. Access: They are often more educated and aware of banking procedures compared to poor households.

1. In situations with high risks, credit might create further problems for the borrower. Explain.
In high-risk situations, such as farming where crops depend on uncertain rainfall, taking a loan is dangerous. If the crop fails, the borrower cannot repay the loan. To repay, they might have to sell their assets like land. This leaves them worse off than before, pushing them into a debt trap where recovery is very painful. (Example: Swapna's case).

2. How does money solve the problem of double coincidence of wants? Explain with an example of your own.
Double coincidence of wants means both parties must agree to sell and buy each other's commodities. Money acts as a medium of exchange, separating the act of sale and purchase.
Example: If I have a bicycle to sell and want to buy a guitar. Without money, I must find a guitar seller who wants a bicycle. With money, I simply sell my bicycle for cash and then go to any music shop to buy a guitar.

3. How do banks mediate between those who have surplus money and those who need money?
1. Banks accept deposits from people who have surplus money (depositors) and pay them interest.
2. Banks keep a small portion (e.g., 15%) as cash reserves.
3. They lend the major portion of the deposits as loans to people who need money (borrowers).
4. They charge a higher interest rate on loans than what they pay on deposits. This difference is the bank's income.

4. Look at a 10 rupee note. What is written on top? Can you explain this statement?
Written on top: "Guaranteed by the Central Government" (and "I promise to pay the bearer the sum of ten rupees").
Explanation: This means that the currency is authorized by the government. The Reserve Bank of India issues it on behalf of the Central Government. The statement is a promise that the note is legal tender and possesses the value printed on it, backed by the sovereign power of the country.

5. Why do we need to expand formal sources of credit in India?
We need to expand formal sources (banks/cooperatives) because:
1. Informal sources (moneylenders) charge very high interest rates, leading to debt traps.
2. Cheap and affordable credit is crucial for the country's development (for farming, small business, etc.).
3. Currently, the poor depend heavily on informal sources; expanding formal credit will ensure equity and reduce their exploitation.

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.
1. Members save small amounts regularly.
2. They can take small loans from the group at low interest to meet needs.
3. After regular savings, the group becomes eligible for bank loans without collateral.
4. This helps them overcome the lack of collateral problem and become financially self-reliant.

7. What are the reasons why the banks might not be willing to lend to certain borrowers?
Banks might not lend if:
1. The borrower has no collateral (security).
2. The borrower lacks proper documents regarding income or employment.
3. The borrower has a history of not repaying previous loans (bad credit history).
4. The purpose of the loan is not deemed viable by the bank.

8. In what ways does the Reserve Bank of India supervise the functioning of banks? Why is this necessary?
How RBI supervises:
1. Monitors if banks are maintaining the required minimum cash balance.
2. Checks that banks give loans not just to profit-making businesses but also to small cultivators and small industries.
3. Banks must submit periodic reports to RBI on lending activities.
Why necessary: To ensure the stability of the banking system and to ensure that the benefits of banking reach the common man and not just the rich.

9. Analyse the role of credit for development.
Credit plays a crucial role in development:
1. Positive Role: It allows farmers to buy inputs, businesses to invest in machinery, and entrepreneurs to start new ventures. This increases production, income, and employment (e.g., Salim's case).
2. Negative Role: If credit is expensive or high-risk, it can lead to debt traps (e.g., Swapna's case), which hinders development.
Therefore, cheap and affordable credit is a prerequisite for national development.

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:
1. Interest Rate: Bank charges low interest; moneylender charges high.
2. Collateral: Does he have assets? If yes, he chooses the bank. If no, he might be forced to go to the moneylender.
3. Documentation: Does he have income proofs? Bank requires them; moneylender does not.
4. Flexibility: Moneylenders might be faster but exploitative; Banks take time but are safe. Ideally, he should choose the bank for financial stability.

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?
Because small farmers often lack proper documentation and collateral (land titles may not be clear), and farming is considered a high-risk activity due to weather dependence.
(b) What are the other sources from which the small farmers can borrow?
Moneylenders, agricultural traders, landlords, relatives, friends, and Self-Help Groups (SHGs).
(c) Explain with an example how the terms of credit can be unfavourable for the small farmer.
Example: A farmer borrows from a trader at a high interest rate (e.g., 5% per month). Additionally, the term of credit requires the farmer to sell the crop only to that trader. This forces the farmer to sell at a low price, preventing them from making a profit.
(d) Suggest some ways by which small farmers can get cheap credit.
1. Forming Cooperatives.
2. Forming Self-Help Groups (SHGs).
3. Government expanding the reach of rural banks.

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.

13. Choose the most appropriate answer.
(i) In a SHG most of the decisions regarding savings and loan activities are taken by
(a) Bank.
(b) Members.
(c) Non-government organisation.
(b) Members.
(ii) Formal sources of credit does not include
(a) Banks.
(b) Cooperatives.
(c) Employers.
(c) Employers.

The following table shows people in a variety of occupations in urban areas. What are the purposes for which the following people might need loans? Fill in the column.

Next, classify the people into two groups based on whom you think might get a bank loan and those who might not. What is the criterion that you have used for classification?
Group A (Likely to get Bank Loan):
- Graduate student (Education loan).
- Person in government service (Salary acts as proof).
- Small trader (If registered/has assets).
- Autorickshaw driver (Vehicle loan against asset).

Group B (Unlikely to get Bank Loan):
- Construction worker.
- Migrant labourer.
- Household maid.
- Worker whose factory closed down.

Criterion Used: The classification is based on the capacity to repay, stability of income, possession of documents, and collateral. Group A has regular income or assets; Group B lacks assets and steady income proof.