money and credit

Question 1

what is the role of money in economy

Answer 1

1. removes the need for double coincidence of wants by acting as a crucial intermediate step
2. widely accepted as the medium of exchange as it is authorized by the government of the country; no individual or organization in India can refuse a payment made in rupees
3. it functions as a unit value

Question 2

what are demand deposits, and what are the advantages of using them?

Answer 2

deposits made with the bank into an account made in their name.
advantages:
1. safety of the money kept in the banks
2. interest is added
3. money can be withdrawn at any place/time on demand

Question 3

what is a cheque

Answer 3

a paper instructing a bank to pay a specific amount from the person’ account to the person whose name has been written on the cheque

Question 4

‘demand deposits constitute money in the modern economy’ justify

Answer 4

1. share the essential features of money
2. make it possible to settle transactions directly without the use of cash
3. widely accepted means of payment
4. can be withdrawn at any point from any place

Question 5

how do banks mediate between those who have surplus and those who have less?

Answer 5

1. banks accept deposits from those who have money, paying them interest on these deposits
2. only around 15% of the money is kept in banks for cash withdrawals, the remaining is given away as loans
3. the rate of interest on loans is higher than that payed to deposits
4. this difference in rate of interest is the main source of income for banks

Question 6

explain the two credit situations

Answer 6

1. whether credit is useful or detrimental depends on the risks of the situation, and the support in case of loss
2. in one situation the borrower obtains credit to meet the capital needs; due to the role of credit, the growth of such businesses improve. credit plays a vital and positive role here
3. on the other hand, taking the example of a small farmer: farmers take money at the start of the season and repay it after harvest. Should the farmer face a crop failure, loan repayment is not possible. they sometimes have to sell their property to pay it back. credit pushes the borrower into a situation that is painful to recover. pushes her into a debt trap

Question 7

what are the terms of credit?

Answer 7

1. rate of interest repaid along with the principal
2. collateral and documentation: an asset that the borrower owns and uses as a guarantee until the loan is repaid. the lender has to right to sell the property if the borrower fails to repay the loan
3. mode of repayment

Question 8

differentiate between the sources of credit

Answer 8

formal and informal sectors:

1. formal sector is from banks and cooperatives whereas informal is from moneylenders, employers, traders and friends
2. the formal sector is monitored by the Reserve Bank of India, whereas there is no supervision of the informal sector (unfair means to get their money back)
3. the formal sector has lower rates of interest but the informal sector has higher rates of interest

Question 9

role of RBI in India

Answer 9

1. print and authorize money
2. ensures that banks maintain a minimum cash balance for withdrawals
3. makes sure that banks lend money to all people, not just profit making business men and traders
4. banks have to periodically submit reports to the RBI on what amounts they are lending, to whom and the rates of interest

Question 10

why should cheap and affordable credit be available to all for development

Answer 10

1. development is sustained by a proper credit policy
2. providing loans to farmers, industrialists, traders etc gives them the necessary funds for carrying out business without problems related to finance
3. this results in increased production and services
4. credit must be provided by banks and cooperatives, as they have lower rates of interest, thus leading to higher incomes for the borrowers.
5. on the other hand, the informal sector charges high rates of interest, that the borrower may not be able to repay. this results in a loss, leading to debt. those who wish to start enterprise may not do so due to these costs

Question 11

explain the trends of money lending in rural and urban areas, among the rich and the poor

Answer 11

1. the formal sector meets only half the credit needs of the rural people. the remaining is met from informal sources. (reasons: inadequate banking system, lots of paperwork, lack of awareness, no collateral to take formal loans from bank)
2. it is thus necessary for banks and cooperatives to increase their lending to rural areas, so the dependence on informal credit reduces
3. it is also observed that the majority of the poor people do not avail loans from credible sources. (lack of collateral, awareness).
4. while the formal sector must expand, it is necessary that everyone should receive these loans.

Question 12

explain the functioning of self help groups

Answer 12

1. present in areas with banks, or where people cannot get loans easily due to the documentation and collateral required.
2. SHG organize the poor into small groups of 15-20 people, who pool their savings. they meet up and save money regularly.
3. members can take loans from the group itself, and the interest is less than that of money lenders. the group members take decisions on the granting of loans -purpose, amount, interest and repayment.
4. after a year or two, if the group saves sufficiently, they become eligible for taking loans from the bank in the name of the group.
5. this is meant to create self employment opportunities to the members.
6. not only does it help women become financially self reliant, the regular meetings of the group provide a platform to discuss and act on social issues like health, nutrition, domestic violence etc