Money and Credit

Money and Credit

Money and Credit carried 5 marks in the 2026-27 sample paper, 4 in February 2026 and 5 in May 2026. It gives one or two MCQs in almost every paper (money as a medium of exchange, why the rupee is accepted, terms of credit, the right source of loan for a farmer, why banks are hard to reach for the poor). It also gives a 3-marker (Self-Help Groups and the banks' risk in the sample paper, the role of the RBI in February 2026) and, twice, the Economics case study (demand deposits and cheques in May 2026, cooperatives in 2025).

Marks are most often lost by calling the cheque itself money, by mixing up collateral with interest, by writing that the RBI supervises moneylenders, and by listing features of Self-Help Groups without saying why a bank trusts them.

Revise in 5 Minutes

Money

• Barter needs a double coincidence of wants: each side must want what the other has.
• Money is a medium of exchange: sell to anyone, buy from anyone.
• Currency is accepted because the government authorises it. The RBI issues notes on behalf of the central government; nobody else may. No one in India can refuse the rupee in payment.
• Demand deposits: money in bank accounts, withdrawable on demand; a cheque moves it to another account.

Banks: keep a small part of deposits as cash (about 15%); lend most of the rest. Interest on loans minus interest on deposits = the bank's main income.

Credit: money, goods or services now, against a promise to pay later. It can raise income (working capital for orders) or cause a debt trap (crop fails, new loans to repay old). Which way it goes depends on the risk and on support in case of loss.

Terms of credit: interest rate, collateral, documents, mode of repayment. Collateral = an asset (land, building, vehicle, livestock, bank deposit) the lender may sell if the loan is not repaid.

The RBI checks cash balances, collects data on loans, and sees that small cultivators and small industries also get loans. Richer households get mostly formal loans; the poor depend on informal ones. Formal credit must expand and reach the poor: it is cheaper and cuts the risk of a debt trap.

Self-Help Groups: 15-20 members, mostly women, from one area; save regularly, lend to members; after a year or two, a bank loan in the group's name without collateral; the group is responsible for repayment.

Grameen Bank (Bangladesh, 1970s; Muhammad Yunus, Nobel Peace Prize 2006): lends mainly to poor women, who repay well.

Traps

• A cheque is not money; the demand deposit is.
• Collateral is an asset, not interest.
• The RBI does not supervise moneylenders.
• 3% a month = 36% a year.

How to use this page: try each question on paper first, then read the answer. The marks against each step show what an examiner looks for. The 1-mark MCQs and Assertion-Reason questions are in the quiz at the end, together with questions that test how well you understand the chapter; every quiz answer comes with its explanation.

Short Answer Questions (2 and 3 Marks)

Question 1 (2 marks)

Distinguish between the barter system and exchange through money on any two points.

Answer.

Model answer:

1. In barter, goods are swapped, so both sides must want what the other has (double coincidence of wants); money removes this need.
2. Barter has no item all accept; money is accepted by everyone, making it a medium of exchange.

Marking scheme:

1. Barter: goods are exchanged directly for goods, so both sides must want what the other has (double coincidence of wants). Money: a person sells to anyone for money and buys from anyone, so no double coincidence is needed. — 1 mark
2. Barter has no common item that everyone accepts, so finding a partner takes long; money is accepted by all and works as a medium of exchange. (Accept: under barter it is hard to compare values of different goods.) — 1 mark

Question 2 (3 marks)

A private company in India starts printing its own paper 'notes' of ₹500, of the same quality as the rupee, and asks shopkeepers to accept them. Would these notes work as money in the way the rupee does? Give three reasons for your answer.

Answer.

Model answer:

No, they would not.

1. The rupee is accepted because the government authorises it; the company's notes have no such backing.
2. Only the RBI may issue currency notes, on behalf of the central government.
3. By law no one in India can refuse the rupee, but anyone can refuse the company's notes, so nobody can trust others to take them.

Marking scheme:

1. No. The rupee is accepted as a medium of exchange because it is authorised by the government of the country; the company's notes have no such authority. — 1 mark
2. In India only the Reserve Bank of India issues currency notes, on behalf of the central government; no other person or organisation is allowed to issue currency. — 1 mark
3. The law makes the rupee a means of payment that cannot be refused in India; nobody is bound to accept the company's notes, so people cannot trust that others will take them. (Accept: good paper or printing does not give a note its value; acceptance does.) — 1 mark

Question 3 (2 marks)

Ramesh pledges his tractor to a bank to get a loan for digging a new well. Explain the role the tractor plays in this loan, and what can happen if he fails to repay.

Answer.

Model answer:

1. The tractor is collateral: an asset Ramesh owns, pledged to the bank as a guarantee until he repays. He can still use it.
2. If he does not repay, the bank can sell the tractor to recover its money.

Marking scheme:

1. The tractor is collateral: an asset Ramesh owns that he pledges to the bank as a guarantee until the loan is repaid. He goes on using it meanwhile. — 1 mark
2. If he fails to repay, the bank has the right to sell the tractor to recover the loan. — 1 mark

Question 4 (2 marks)

Raghav says, 'Credit just means borrowing cash from a bank.' Correct him, giving two examples.

Answer.

Model answer:

1. Credit means getting money, goods or services now against a promise to pay later.
2. A grocer lets a family pay for a month's groceries on salary day; a timber merchant gives a carpenter wood, paid after the furniture sells.

Marking scheme:

1. Credit is an agreement in which the lender supplies money, goods or services now, in return for the promise of payment later; it need not be cash, and it need not come from a bank. — 1 mark
2. Any two examples, at least one not a bank cash loan: a grocer lets a family take groceries all month and pay on salary day; a timber merchant supplies wood to a carpenter, to be paid after the furniture is sold; a relative lends money for a wedding. — 1 mark

Question 5 (2 marks)

Distinguish between formal and informal sources of credit on any two bases.

Answer.

Model answer:

1. Formal lenders are banks and cooperatives; informal lenders are moneylenders, traders, employers, relatives and friends.
2. The RBI supervises formal lenders. Nobody checks informal lenders, so they can charge any interest and may use unfair means.

Marking scheme:

1. Who lends: formal sources are banks and cooperatives; informal sources are moneylenders, traders, employers, relatives and friends. — 1 mark
2. Supervision: the RBI supervises formal lenders; no organisation supervises informal lenders, so they can charge any interest and may use unfair means to recover loans. (Also accept: formal loans are usually cheaper; formal lenders ask for collateral and documents.) — 1 mark

Question 6 (2 marks)

Give two reasons why people prefer to keep their extra cash as deposits in a bank rather than at home.

Answer.

Model answer:

1. The money is safe in the bank; at home it could be stolen or lost.
2. The bank pays interest on deposits, and the money can still be taken out whenever it is needed.

Marking scheme:

1. Safety: the money is kept safely by the bank, instead of being at risk of theft or loss at home. — 1 mark
2. Interest: the bank pays interest on the deposit. (Also accept: the money can be withdrawn whenever needed, and payments can be made from it by cheque.) — 1 mark

Question 7 (3 marks)

How is borrowing from a farmers' cooperative different from borrowing from a village moneylender? Explain three points.

Answer.

Model answer:

1. A cooperative belongs to its members, who pool their savings; a moneylender lends his own money for profit.
2. A cooperative is a formal lender with reasonable interest; the moneylender is not supervised, often charges very high interest and may use unfair means.
3. Money repaid to a cooperative is lent again to members; a moneylender's interest only adds to his earnings.

Marking scheme:

1. Who owns the money: a cooperative belongs to its members, who pool their savings; the moneylender lends his own money to make a profit. — 1 mark
2. Cost and control: a cooperative is a formal source and lends at reasonable interest; the moneylender is not supervised by anyone, often charges very high interest and may use unfair means to recover. — 1 mark
3. Use of repayments: when members repay, the money goes back into the common fund for the next round of loans to members; interest paid to a moneylender only adds to his own earnings. (Accept: a cooperative lends for many needs of members, such as tools, cultivation or a house.) — 1 mark

Question 8 (3 marks)

A social worker in an imaginary country wants to start a bank for poor village women, on the lines of the Grameen Bank of Bangladesh. Explain three lessons that the Grameen Bank's experience offers her.

Answer.

Model answer:

1. Poor women can be trusted with loans: the Grameen Bank's borrowers, mostly women from the poorest families, repay them.
2. Given credit, such women start and run many kinds of small work that earn an income.
3. The terms must suit the poor, with reasonable rates; then many small borrowers together can add a lot to development.

Marking scheme:

1. Poor women can be reliable borrowers: the Grameen Bank's borrowers, almost all women from the poorest families, have repaid their loans. — 1 mark
2. With credit, poor women can start and run small income-earning work of many kinds, which raises their family's income. — 1 mark
3. Credit must reach the poor on fair and reasonable terms; then many small borrowers together can bring large gains in development. (Accept: a small start can grow large, as the Grameen Bank grew from a small project of the 1970s.) — 1 mark

Long Answer and Case-Based Questions

Question 9 (5 marks)

Study the table given below and answer the questions that follow.

Jyoti sells flowers in the imaginary town of Kesarganj. She needs ₹30,000 for one year to buy a hand-cart and a bigger stock of flowers. She owns no land or house, but she has a pair of gold earrings and ₹5,000 saved with the town's credit cooperative. The table shows the offers she has. (Hypothetical)

(a) Which two lenders in the table are not supervised by the Reserve Bank of India? (1 mark)

Answer.

Model answer:

P and S, the moneylender and the wholesaler, because they are informal lenders.

Marking scheme:

1. P (the moneylender) and S (the wholesaler): they are informal lenders, and no organisation supervises them. — 1 mark

(b) Work out the interest Jyoti would pay to P and to Q on ₹30,000 for one year (count the interest on the full ₹30,000 for the whole year). What would the difference mean for her? (2 marks)

Answer.

Model answer:

1. P: 3% × 12 = 36% a year, so ₹10,800. Q: 11% of ₹30,000 = ₹3,300. P costs ₹7,500 more.
2. With P, much more of her earnings would go in repayment, leaving less for her family and business.

Marking scheme:

1. P: 3% a month × 12 = 36% a year, so 36% of ₹30,000 = ₹10,800. Q: 11% of ₹30,000 = ₹3,300. P costs ₹7,500 more. — 1 mark
2. With P, a much bigger part of her earnings would go in repaying the loan, leaving less for her family and for running her business. — 1 mark

(c) S asks for no interest. Give two reasons why S's loan may still cost Jyoti a lot. (2 marks)

Answer.

Model answer:

1. She must sell all her flowers at S's price, probably below the market price; the lost income is a hidden interest.
2. She cannot sell to others for more and stays tied to S until she repays, so she cannot bargain.

Marking scheme:

1. She must sell all her flowers at the price S fixes, which is likely to be below the market price; the income she loses works like a hidden interest. — 1 mark
2. She cannot sell to other buyers for a better price and stays tied to S until the loan is repaid, so she loses her power to bargain. (Accept: the longer she takes to repay, the longer she sells at his price.) — 1 mark

OR

Study the same table and answer the following.

(a) What is the largest loan Jyoti can get from R? (1 mark)

Answer.

Model answer:

2 × ₹5,000 = ₹10,000.

Marking scheme:

1. ₹10,000, since R lends a member up to twice her savings (2 × ₹5,000). — 1 mark

(b) Q charges much less interest than P. Explain why Jyoti still cannot borrow from Q, and why this pushes people like her towards lenders like P and S. (2 marks)

Answer.

Model answer:

1. Q wants land or house papers as collateral and proof of income; Jyoti has neither.
2. So poor people like her lose cheap bank credit and turn to informal lenders, who ask for less collateral but cost much more.

Marking scheme:

1. Q asks for land or house papers as collateral and proof of income; Jyoti has no land or house and probably no income papers, so the bank will not lend to her. — 1 mark
2. Poor people without collateral and documents are shut out of cheap bank credit, so they borrow from informal lenders who ask for little collateral but charge much more. — 1 mark

(c) R's limit leaves Jyoti ₹20,000 short. Suggest two ways in which she could get cheaper credit for the rest of the money she needs. (2 marks)

Answer.

Model answer:

1. Join a Self-Help Group with other vendors; after regular saving, the group can get a bank loan without collateral.
2. Save more with the cooperative to raise her limit, or ask banks and cooperatives to lend more to small vendors.

Marking scheme:

1. She could join or form a Self-Help Group with other vendors: after a year or two of regular saving, the group can get a bank loan without collateral and lend to members at a fair rate. — 1 mark
2. She could keep saving with the cooperative to raise her borrowing limit, and take the smaller balance later; or banks and cooperatives could be asked to open more lending to small vendors like her. (Accept any sensible formal-credit step.) — 1 mark

Question 10 (5 marks)

Two friends are arguing about loans. Asha says, 'A family should never borrow; loans only bring trouble.' Deepak says, 'A loan always helps, because it lets you do more.' Study the loans of two small traders in an imaginary town (hypothetical) and answer the questions that follow, to show why both friends are wrong.

(a) Work out Shabana's monthly instalment (count 12% on the full ₹24,000 for the year), and explain why her loan is likely to help her. (2 marks)

Answer.

Model answer:

1. Interest ₹2,880, total ₹26,880, so ₹26,880 ÷ 12 = ₹2,240 a month.
2. Even in a bad month she earns ₹6,000, and the new machine brings more work, so the loan raises her income.

Marking scheme:

1. Interest = 12% of ₹24,000 = ₹2,880; total ₹26,880; monthly instalment = ₹26,880 ÷ 12 = ₹2,240. — 1 mark
2. ₹2,240 is well within even her bad-month earnings of ₹6,000, and the second machine lets her take more work, so her income rises and she can repay without strain. — 1 mark

(b) Bhanu's first three months are good and the next three are bad. Compare what he owes at the end of month 6 with what he earns in the six months. Then say which term of his loan, the interest rate or the lump-sum repayment, makes it harder to repay, using figures from the table. (3 marks)

Answer.

Model answer:

1. He owes ₹24,000 + ₹7,200 = ₹31,200 and earns 3 × ₹12,000 + 3 × ₹3,000 = ₹45,000, so about 70% goes on this loan.
2. The lump sum hurts more: all ₹31,200 is due just after three ₹3,000 months, so he must save almost all his good-month earnings. (The rate also hurts: ₹7,200 in six months, two and a half times Shabana's yearly ₹2,880.)

Marking scheme:

1. Owes ₹24,000 + ₹7,200 (5% × 6 months = 30%) = ₹31,200; earns 3 × ₹12,000 + 3 × ₹3,000 = ₹45,000. About 70% of six months' earnings goes on this one loan, leaving little to run his home. — 1 mark
2. The lump sum does more harm: the whole ₹31,200 falls due right after three months of only ₹3,000, so he must have kept back almost all of his ₹36,000 from the good months while also feeding his family. (Give full marks if the student picks the rate instead and backs it with figures: 5% a month is 60% a year, and ₹7,200 for six months is two and a half times Shabana's ₹2,880 for a whole year.) — 2 marks

OR

Answer the following questions.

(a) Distinguish between currency and demand deposits as forms of money on any two points. (2 marks)

Answer.

Model answer:

1. Currency is the notes and coins people hold (the RBI issues the notes); demand deposits are money in bank accounts, withdrawable on demand.
2. Currency changes hands directly and cannot be refused; deposits move between accounts through cheques, without cash.

Marking scheme:

1. Currency is the notes and coins people hold; in India the RBI issues the notes on behalf of the central government. Demand deposits are money kept in bank accounts that can be withdrawn on demand. — 1 mark
2. Currency is used by handing over notes, and the law says it cannot be refused; demand deposits are used through cheques, with money moving from one account to another without cash. (Accept: deposits earn interest, cash kept at home does not.) — 1 mark

(b) The table shows the crop cash of Kusum, a farmer in an imaginary village (hypothetical figures, in ₹). She has ₹5,000 saved and borrows ₹25,000 in June; she must repay ₹28,000 (loan plus interest).

In which month can Kusum repay, and why not earlier? How much would she have left if the price of her crop fell by a quarter? (3 marks)

Answer.

Model answer:

1. November: she spends ₹30,000 from June to September and earns nothing until the crop is sold.
2. Normally she repays ₹28,000 from ₹45,000 and keeps ₹17,000.
3. At a quarter lower price she gets ₹33,750 and keeps only ₹5,750, barely her savings, with nothing to live on till the next harvest or for the next sowing.

Marking scheme:

1. November: she spends ₹30,000 from June to September and earns nothing until the crop is sold, so she has nothing to repay with before then. — 1 mark
2. At the normal price she repays ₹28,000 out of ₹45,000 and keeps ₹17,000. — 1 mark
3. If the price falls by a quarter she gets ₹33,750; after repaying ₹28,000 only ₹5,750 is left, about what she had saved, with nothing more to live on till the next harvest or to pay for the next sowing. — 1 mark

Question 11 (4 marks)

Read the source given below and answer the questions that follow.

A Letter from Pipalgaon

Dear Rekha didi,

You asked about our group. We are seventeen women from the same mohalla. Two years ago we began saving ₹100 each every month, and our treasurer keeps the money in a bank account in the group's name. From these savings we started giving small loans to one another, for school fees or a sick buffalo, at far lower interest than the moneylender took from our mothers, and nobody had to pawn her earrings.

At our monthly meeting we all decide who gets a loan, for what, and how it will be repaid. Last March the bank gave our group ₹2 lakh. Seven of us bought goats, Bindu bought a sewing machine, and I have started making pickles for the weekly market. When Radha fell behind last month, three of us went to see how we could help her catch up.

The meetings have also become a place to talk about the girls' schooling and the new health centre. In April I spoke at the gram sabha for the first time!

Your sister,
Lalita

(A letter written for this question; the village and people are imaginary.)

(a) Where did the money for the group's first loans to its members come from? (1 mark)

Answer.

Model answer:

From the members' own monthly savings, pooled in the group's account.

Marking scheme:

1. From the members' own savings, pooled every month in the group's bank account. — 1 mark

(b) Why did three members go to see Radha when she fell behind with her repayment? (1 mark)

Answer.

Model answer:

The whole group is responsible for repaying the bank loan, so members follow up anyone who falls behind.

Marking scheme:

1. The bank loan is in the group's name, so the whole group is responsible for repaying it; members therefore follow up anyone who falls behind. (Accept: this is why the bank can trust the group without collateral.) — 1 mark

(c) Apart from giving loans, explain two ways in which the group has helped its members. (2 marks)

Answer.

Model answer:

1. Members started their own earning work, such as goats, tailoring and pickles, so they have an income of their own.
2. Meetings are a place to discuss schooling and health, and women like Lalita now speak up at the gram sabha.

Marking scheme:

1. Self-employment: the bank loan let members start their own earning work (goats, tailoring, pickles), so they now have an income of their own. — 1 mark
2. A platform for other issues and confidence: the meetings are used to discuss girls' schooling and health, and members like Lalita now speak up in public, at the gram sabha. (Accept: members support one another in hard times, as with Radha.) — 1 mark

Question 12 (4 marks)

Read the source given below and answer the questions that follow.

Minutes of the Gram Panchayat Meeting, Tilakpur

Item 3: A bank branch for the village

Ward member Sushila Devi said that most families borrow from two moneylenders who charge 4 per cent a month. "They lend at any hour and ask for no papers," she said, "but last year three families had to sell their land to clear old loans."

The sarpanch reported that the district cooperative bank will open a branch if at least 300 villagers open accounts. He reminded members that the branch would have to follow the rules of the Reserve Bank of India, including rules on keeping cash and on lending to small borrowers.

Mr Iqbal, a retired teacher, warned that a branch alone would not help families with no land papers, and suggested that women first form savings groups.

Decision: the panchayat will collect names for new accounts and write to the district cooperative bank.

(Minutes written for this question; the village and people are imaginary.)

(a) Whose rules would the new branch have to follow, according to the minutes? (1 mark)

Answer.

Model answer:

The Reserve Bank of India's rules, such as those on keeping cash and lending to small borrowers.

Marking scheme:

1. The Reserve Bank of India's, including its rules on keeping cash and on lending to small borrowers. — 1 mark

(b) What yearly rate of interest do Tilakpur's moneylenders charge? (1 mark)

Answer.

Model answer:

4% a month × 12 = 48% a year.

Marking scheme:

1. 4 per cent a month × 12 = 48 per cent a year. — 1 mark

(c) Explain two reasons why the panchayat is right to press for a formal lender that reaches poor families. (2 marks)

Answer.

Model answer:

1. Formal loans cost far less than 48% a year, so families keep more of their income for food, schooling and their own work.
2. Cheap credit lets poor families invest in crops or small work and earn more, which helps the village develop.

Marking scheme:

1. Formal loans cost far less than 48 per cent a year, so families keep more of what they earn for food, schooling and their own work. — 1 mark
2. With cheap credit, poor families can invest in their crops or small work and earn more, which also helps the village and the country develop. (Accept: formal lenders cannot use unfair means to recover loans.) — 1 mark