Money and Credit : NCERT Intext Questions


Page 40

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

Sol.     Unlike the barter system, exchange by using money does not need a double coincidence of wants. Hence, money makes it easier to exchange things. Let us take example of a student who wants to sell his old books and wants to buy a guitar in lieu of that. If he opts for the barter system, he will have to search a person who may be interested in giving off his guitar and in taking old books. But finding such a person can be difficult and time consuming. On the other hand, if the student sells his books and takes money for that, he can easily go to a shop to buy a guitar.

Q.2     Can you think of some examples of goods / services being exchanged or wages being paid through barter?
Sol.     Barter system does exist at some degree in our society. Farmers often use this system of exchange to barter different types of farm produce. Even some friends may exchange certain items among each other. Some hawkers sell trinkets and edible stuff in lieu of old bottles and plastic containers.

Page 45

Q.1     Why do lenders ask for collateral while lending?
Sol.     The collateral is a kind of surety, which the lender can hold on to. In case of de debtor failing to repay the loan, the lender can recover some money by selling the collateral.

Q.2    Given that a large number of people in our country are poor, does it in any way affect their capacity to borrow?
Sol.     Credit is always given after properly assessing the repayment capacity of the borrower. Since poor people do not have repayment capacity, they are usually unable to get a loan; especially from the formal sector. They get some loan from the informal sector but in that case, they often fall in debt trap because of very high rate of interest.

Q.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, less (less/more) collateral and documentation requirements.

Page 50

Q.1     What are the differences between formal and informal sources of credit?
Sol.     The formal sector gives loan only after thorough check of the borrower. Suitable paperwork are done before giving the loan so that both the borrower and the creditor can resort to judicial process in case of any problem. Rate of interest is governed by the government rules when loan is given by the formal sources. In case of informal sector, rate of interest is usually very high and the borrower cannot go to the courts in case of being subjected to arm-twisting tactics by the creditor. Informal sector usually works on personal influence and relation of the borrower and creditor.

Q.2     Why should credit at reasonable rates be available for all?
Sol.     Credit is an important aspect of economic activity. Right from a small farmer to a big business tycoon; everyone needs to borrow at some time to improve productivity. In case of unreasonable rates, the borrower always runs the risk of falling in the debt trap which is not good for the society and the economy. Hence, reasonable rates are important for all.

Q.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?
Sol.     The informal lenders work according to their own set of rules. They seldom maintain proper records and do not reveal their transaction detail to the government authority. Most of the money involved in this is black money and the lender always wants to earn windfall profits. They will oppose every attempt to bring them into the ambit of governance. Hence, it would be very difficult for supervisor to look into the loan activities of informal sector.

Q.4     Why do you think that the share of formal sector credit is higher for the richer households compared to the poorer households?
Sol.     The formal sector credit is available to those who have good repayment capacity. Lending money is the main source of income for banks. They cannot afford to lend to the poor and suffer losses in the bargain. Due to this, the share of formal sector credit is higher for the richer households compared to the poorer households.


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