About This Section
This is a collection of important questions with complete model answers covering the whole of Chapter 3 — Money and Credit. It covers money and the double coincidence of wants, modern forms of money, the loan activities of banks, the two faces of credit, terms of credit, formal and informal sources, and Self-Help Groups.
Questions and Answers
Q1. How does money solve the problem of double coincidence of wants? Explain with an example.
Answer: In barter, both parties must want exactly what the other offers — a double coincidence of wants. Money removes this by acting as an intermediate step. For example, a teacher who wants rice need not find a rice-seller who wants teaching; she simply receives her salary in money and buys rice from any seller. Money thus makes exchange possible without the two wants having to coincide.
Q2. How do banks mediate between depositors and borrowers?
Answer: Banks accept deposits from people who have surplus money and pay them interest. They keep only a small cash reserve (about 5 per cent) and lend out the rest to borrowers who need funds, charging a higher interest. The bank's income is the difference between interest received from borrowers and interest paid to depositors. In this way banks act as a mediator, channelling savings into productive loans.
Q3. Why do we need to expand formal sources of credit in India?
Answer: We need to expand formal credit because informal loans carry very high interest, take a large share of the borrower's income and can cause a debt-trap. At present the poor depend on costly informal sources while the rich enjoy cheap formal loans. Expanding formal credit — and distributing it more equally — would give the poor cheap, timely loans, help them raise their incomes, and support the country's development.
Q4. Why might banks be unwilling to lend to certain borrowers, such as small farmers?
Answer: Banks may be unwilling because such borrowers often lack collateral and proper documentation, which banks require as security. Their incomes are irregular and risky (e.g., dependent on the monsoon), so there is a higher chance of non-repayment, especially if the crop fails. Without collateral to fall back on, banks see these loans as risky and hesitate to lend.
Q5. In situations with high risk, how can credit create further problems for the borrower?
Answer: In high-risk situations, the borrower's plan may fail — for example, a crop destroyed by pests, as with Swapna. The borrower is then unable to repay, and the debt grows over time. To clear it, they may have to sell assets like land, ending up worse off than before. This is a debt-trap: credit, instead of helping, pushes the borrower into deeper distress.
Q6. What is the basic idea behind Self-Help Groups (SHGs)? How do they help the poor?
Answer: An SHG organises the rural poor — mainly women — into a small group (about 15–20 members) that pools its savings. Members take small loans from the group, and after regular saving the group becomes eligible for a bank loan given in the group's name. Because the group is responsible for repayment, banks lend without collateral. SHGs thus give the poor timely, cheap credit and also help women become self-reliant and act on social issues.
Q7. Look at a ten-rupee note. What is written on it, and what does it mean?
Answer: A ten-rupee note carries the words 'I promise to pay the bearer the sum of ten rupees', signed by the Governor of the Reserve Bank of India. This means the RBI, which issues the note on behalf of the central government, guarantees its value. It is this government authorisation that makes the rupee acceptable as a medium of exchange, even though the paper has no value of its own.