NCERT Solutions For Class 10 Economics Chapter-3: Money and Credit

NCERT Solutions For Class 10 Economics Chapter 3 Money and Credit– This article includes free NCERT Solutions For Class 10 Economics Chapter 3 Money and Credit to help students of Class 10 learn the solutions and ace their exams.

It has been developed by the subject matter experts at GFG, according to the latest CBSE Syllabus 2023-24, and guidelines to help the students of Class 10 create a solid conceptual base for Class 10 Economics Chapter 3, Money and Credit.

The solutions to all the exercises in Class 10 Economics Chapter 3, Money and Credit of your NCERT textbook, have been collectively covered in NCERT Solutions Class 10 Social Science.

The solutions for Chapter 3 Money and Credit are provided below, and students can refer to NCERT Solutions for Class 10 for other subjects as well.

Exercise Page No 52

1. In situations with high risks, credit might create further problems for the borrower. Explain.

Answer:

In high-risk situations, borrowers may struggle to meet their repayment obligations due to uncertainties such as economic downturns, market volatility, or unexpected events. When borrowers default on their loans, it can lead to a chain reaction of financial distress, affecting lenders, investors, and the broader economy. This risk amplification is particularly pronounced in scenarios where credit is extended without adequate assessment of the borrower’s ability to repay or when financial institutions engage in reckless lending practices. Consequently, rather than mitigating risks, credit in such situations can increase financial instability and create systemic problems for both borrowers and lenders.

2. How does money solve the problem of double coincidence of wants? Explain with an example of your own.

In economics, the double coincidence of wants refers to the challenge of finding a trading partner who not only has what you want but also wants what you have. Money solves this problem by acting as a medium of exchange, enabling individuals to trade goods and services without requiring a direct match of preferences.

For example, consider a scenario where Alice wants to buy a bicycle but only has chickens to offer in exchange. If she cannot find someone who wants chickens and has a bicycle to trade, she would face difficulty acquiring the bicycle. However, if money is introduced into the system, Alice can sell her chickens for money and then use that money to purchase the bicycle from a different seller. In this way, money facilitates transactions by eliminating the need for a double coincidence of wants.

3. How do banks mediate between those who have surplus money and those who need money?

Answer:

Banks serve as intermediaries between those who have surplus money (savers or depositors) and those who need money (borrowers). They facilitate this mediation through the process of financial intermediation, which involves the following steps:

1. Accepting Deposits: Banks collect deposits from individuals and businesses who have surplus funds and are looking for a safe place to store their money. These deposits can be in the form of savings accounts, current accounts, fixed deposits, etc.
2. Lending Money: Banks use the funds deposited by savers to extend loans and credit to individuals, businesses, or other entities who need financial assistance. This includes various types of loans such as personal loans, home loans, business loans, etc.
3. Charging Interest: Banks charge a higher interest rate on the loans they provide compared to the interest rate they offer on deposits. The difference between the interest earned on loans and the interest paid on deposits serves as the bank’s profit margin.
4. Managing Risks: Banks play a crucial role in assessing the creditworthiness of borrowers and managing the associated risks. They evaluate loan applications, determine the terms and conditions of lending, and implement risk management practices to minimize the likelihood of defaults.
5. Providing Other Financial Services: In addition to deposit-taking and lending, banks offer a wide range of financial services such as investment management, insurance, foreign exchange services, etc., to meet the diverse needs of their customers.

4. Look at a 10 rupee note. What is written on top? Can you explain this statement?

Answer:

On top of a 10 rupee note, the statement “Reserve Bank of India” is written. This indicates that the currency is issued and guaranteed by the Reserve Bank of India (RBI), which is the central bank of the country.

The statement signifies that the currency note is a legal tender authorized by the central monetary authority of India. It confirms that the note holds value and can be used as a medium of exchange for goods and services within the country. Additionally, it reflects the trust and confidence placed in the Reserve Bank of India to maintain the stability and integrity of the currency system, ensuring its acceptance and usability in the economy.

5. Why do we need to expand formal sources of credit in India?

Answer:

Expanding formal sources of credit in India is essential for several reasons:

• Financial Inclusion: Formal credit sources extend banking services to underserved areas and marginalized communities.
• Reduced Dependence: Reduces reliance on exploitative informal lenders, mitigating debt traps and improving financial well-being.
• Economic Growth: Facilitates investment in productive activities, fostering entrepreneurship, job creation, and overall economic development.
• Financial Stability: Regulated institutions adhere to prudent practices, reducing systemic risks and ensuring the stability of the financial system.
• Inclusive Growth: Enables marginalized segments to access financial services, promoting equitable distribution of wealth and opportunities for all.

6. What is the basic idea behind the SHGs for the poor? Explain in your own words.

Answer:

Self-Help Groups (SHGs) for the poor are based on the fundamental principle of collective empowerment and mutual support among individuals from economically disadvantaged backgrounds. The basic idea is to bring together a small group of individuals, from similar socio-economic backgrounds, to pool their resources, share knowledge, and support each other in their socio-economic efforts.

Through regular meetings and contributions, members of SHGs build a sense of solidarity and trust, enabling them to access financial services, undertake income-generating activities, and address common issues such as savings mobilization, skill development, and social empowerment. SHGs empower participants to take control of their financial and social lives, promoting self-reliance, resilience, and community development.

7. What are the reasons why the banks might not be willing to lend to certain borrowers?

Answer:

Banks might be unwilling to lend to certain borrowers due to various reasons:

• Lack of financial documentation or incomplete/inaccurate information provided by borrowers.
• Economic uncertainty leading to cautious lending practices by banks.
• Risks associated with specific industries or sectors.
• Regulatory compliance requirements that restrict lending to certain borrowers.
• Inability to provide adequate collateral to secure the loan.
• High existing debt burden of borrowers.
• Legal or compliance issues that pose risks to the bank.

8. In what ways does the Reserve Bank of India supervise the functioning of banks? Why is this necessary?

Answer:

The Reserve Bank of India (RBI) supervises the functioning of banks through various measures:

1. Licensing: RBI grants licenses to banks for establishment and operation, ensuring they meet regulatory requirements.
2. Prudential Regulations: RBI sets prudential norms, guidelines, and regulations regarding capital adequacy, asset quality, liquidity, and risk management for banks to follow.
3. On-site Inspections: RBI conducts regular on-site inspections of banks to assess their financial health, risk management practices, compliance with regulations, and internal controls.
4. Off-site Surveillance: RBI monitors banks’ activities through off-site surveillance mechanisms, analyzing financial statements, regulatory reports, and other relevant data.
5. Prompt Corrective Action (PCA): RBI initiates PCA measures for banks facing financial distress or breaching regulatory thresholds to prevent further deterioration and ensure corrective actions are taken.
6. Supervisory Reviews: RBI conducts supervisory reviews to evaluate banks’ governance structures, internal controls, and adherence to regulatory requirements.
7. Enforcement Actions: RBI takes enforcement actions against banks for non-compliance with regulations, including imposing fines, penalties, or license revocation.
8. Policy Framework: RBI develops and implements policies and guidelines related to banking operations, risk management, and financial stability to ensure the soundness and stability of the banking system.

Supervision by the RBI is necessary to:

• Ensure Financial Stability: Supervision helps maintain the stability and integrity of the banking system, safeguarding depositors’ funds and maintaining public trust in the financial system.
• Mitigate Risks: Supervision identifies and mitigates risks associated with banks’ operations, preventing systemic failures and contagion effects on the economy.
• Protect Depositors: Supervision ensures banks adhere to prudential norms and regulations, protecting depositors’ interests and promoting financial inclusion and consumer protection.
• Uphold Confidence: Effective supervision enhances market confidence, investor trust, and credibility in the banking sector, contributing to overall economic growth and development.

9. Analyse the role of credit for development.

Answer:

Role of Credit for Development:

1. Economic Growth: Credit facilitates investment in productive activities such as infrastructure, agriculture, manufacturing, and services, stimulating economic growth and development.
2. Entrepreneurship and Innovation: Access to credit enables entrepreneurs and small businesses to finance new ventures, expand operations, innovate, and create employment opportunities, fostering entrepreneurship and innovation.
3. Poverty Alleviation: Credit allows individuals and households to invest in education, healthcare, housing, and livelihoods, lifting them out of poverty and improving their standard of living.
4. Infrastructure Development: Credit supports the development of infrastructure projects such as roads, bridges, power plants, and telecommunications networks, enhancing connectivity, productivity, and competitiveness.
5. Agricultural Development: Credit provides farmers with funds to purchase inputs, equipment, and technology, improving agricultural productivity, income levels, and food security.
6. Industrialization: Credit facilitates industrial growth by financing the establishment, expansion, and modernization of industries, promoting industrialization, job creation, and economic diversification.
7. Financial Inclusion: Credit expands access to financial services for marginalized and underserved populations, including women, rural communities, and small-scale enterprises, promoting financial inclusion and empowerment.
8. Human Capital Development: Credit supports investments in human capital through education loans, skill development programs, and healthcare financing, enhancing workforce productivity, competitiveness, and socio-economic 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.

Answer:

Manav’s decision to borrow from a bank or a moneylender depends on various factors:

• Interest Rate: Manav will compare interest rates, opting for the lower one to minimize borrowing costs.
• Repayment Terms: He will assess repayment terms, favoring the option with more favorable and manageable terms.
• Loan Amount: Manav will consider the loan amount needed and the source capable of providing it.
• Collateral Requirement: He will evaluate his ability to provide collateral and associated risks.
• Documentation: Manav will consider the paperwork and formalities required by each source.
• Reputation: He will assess the reputation, credibility, and reliability of both options.
• Legal Considerations: Manav will consider legal and regulatory implications, favoring options with proper legal protection.

Overall, Manav will weigh these factors carefully and choose the borrowing option that best suits his financial needs, preferences, and circumstances while ensuring affordability, reliability, and legal compliance.

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?

(b) What are the other sources from which the small farmers can borrow?

(c) Explain with an example how the terms of credit can be unfavourable for the small farmer.

(d) Suggest some ways by which small farmers can get cheap credit.

Answer:

a) Banks might be unwilling to lend to small farmers due to several reasons:

• Lack of Collateral: Small farmers often lack sufficient collateral to secure loans, making them risky borrowers in the eyes of banks.
• High Transaction Costs: The cost of processing small loans for small farmers may be high relative to the loan amount, making it unprofitable for banks.
• Limited Financial Literacy: Small farmers may have limited financial literacy and documentation, making it challenging for banks to assess their creditworthiness.
• Seasonal Nature of Agriculture: Agriculture is subject to seasonal risks and uncertainties, which may deter banks from extending credit to small farmers.

(b) Other sources from which small farmers can borrow include:

• Cooperative Societies: Agricultural cooperatives and self-help groups may provide credit to their members at reasonable rates.
• Microfinance Institutions: Microfinance institutions specialize in providing financial services to underserved populations, including small farmers.
• Moneylenders: In rural areas, small farmers may resort to borrowing from informal sources such as moneylenders, albeit at higher interest rates.

(c) Example: The terms of credit can be unfavorable for small farmers due to high-interest rates, short repayment periods, and stringent collateral requirements. For instance, a small farmer may borrow from a moneylender at a high-interest rate of 36% per annum, with weekly repayments and the risk of losing their land as collateral in case of default. Such terms can trap farmers in a cycle of debt and lead to distress.

(d) Ways small farmers can access cheap credit:

• Strengthening Rural Banking: Banks can establish rural branches and mobile banking facilities to reach small farmers in remote areas, reducing transaction costs and improving accessibility.
• Government Subsidies: Government schemes offering subsidized credit to small farmers, such as the Kisan Credit Card (KCC) scheme, can provide cheap credit.
• Enhancing Financial Inclusion: Promoting financial literacy and awareness among small farmers, facilitating their access to formal financial services and improving their creditworthiness.
• Strengthening Agricultural Cooperatives: Supporting and strengthening agricultural cooperatives to provide affordable credit and other financial services to their members.

12. Fill in the blanks:

(i) Majority of the credit needs of the _________________households are met from informal sources.

(ii) ___________________costs of borrowing increase the debt-burden.

(iii) __________________ issues currency notes on behalf of the Central Government.

(iv) Banks charge a higher interest rate on loans than what they offer on __________.

(v) _______________ is an asset that the borrower owns and uses as a guarantee until the loan is repaid to the lender.

Answer:

(i) Majority of the credit needs of the rural households are met from informal sources.

(ii) High costs of borrowing increase the debt-burden.

(iii) Reserve Bank of India (RBI) 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.

(ii) Formal sources of credit does not include

(a) Banks.

(b) Cooperatives.

(c) Employers.

Answer:

(i) Members

(ii) Employers

Chapter 3, “Money and Credit,” examines the role of money and credit in the economy. It discuss the functions of money, such as a medium of exchange, unit of account, and store of value. Additionally, it discusses the importance of formal and informal credit sources, including banks and moneylenders, in meeting the credit needs of various sections of society. The chapter also examines the working of the formal credit system, challenges faced by borrowers, and measures to promote financial inclusion and access to affordable credit.

• Terms of Credit
• Credit Creation
• Difference between Formal and Informal Sources of Credit 
• Money Multiplier
• Money and Banking
• Classification of Money
• Two different Credit Situations

What is the relationship between credit and money?

Credit facilitates the circulation and utilization of money by providing access to funds beyond one’s immediate financial resources.

Why is money called credit?

Money is referred to as credit because it represents a promise or obligation to pay, functioning as a medium of exchange and a store of value within the economy.

What is called credit?

Credit is the provision of funds or resources by one party to another, typically with the expectation of repayment along with interest or fees.

Can credit mean money?

Credit can represent purchasing power or monetary value that is extended to individuals or entities, akin to money, facilitating transactions and economic activities.

What is the role of credit in money?

The role of credit in money lies in its ability to expand the effective money supply by allowing individuals and businesses to access funds beyond their immediate cash holdings, thus facilitating economic transactions and activity.