Eco ch 3- Money and Credit

Define "Double coincidence of wants".

Double coincidence of wants means that what a person desires to sell is exactly what the other person wishes to buy.

Why is double coincidence of wants essential in a barter system?

In a barter system, double coincidence of wants is essential because goods are directly exchanged without money, and both parties must have what the other wants.

Who issues currency notes on behalf of the Central Government in India?

The Reserve Bank of India (RBI) issues currency notes on behalf of the Central Government in India.

What are the legal guidelines around currency issuance in India?

According to Indian law:

1. Only RBI is allowed to issue currency.

2. Rupees are a legal medium of payment that cannot be refused in transactions.

3. No one can legally refuse a payment made in rupees.

How much of their deposits do banks in India typically hold as cash?

Banks in India typically hold about 15% of their deposits as cash.

What do banks primarily use deposits for?

Banks primarily use deposits to extend loans.

How do banks generate income?

Banks earn income through the difference between the interest charged to borrowers and the interest paid to depositors.

What is the main purpose of credit demand in rural areas?

In rural areas, the main demand for credit is for crop production.

Provide examples of collateral in credit.

Collateral can include land, livestock, or deposits with banks.

List the components of the terms of credit.

The terms of credit include interest rate, documentation requirements, and collateral.

Explain the role of cooperatives in credit and resource pooling.

Cooperatives involve members pooling resources for mutual support in specific areas. They are a major source of affordable credit in rural areas and include farmer cooperatives, weaver cooperatives, and worker cooperatives.

Identify examples of informal sector loans.

Informal sector loans include moneylenders and traders.

What was the major source of credit for rural households in India as of 2012?

As of 2012, the major source of credit for rural households was moneylenders.

What does the RBI do to ensure fair banking practices?

The RBI supervises banks to maintain cash balances, monitors lending rates, and ensures loans are offered fairly across sectors.

How can a high-interest rate lead to a debt trap?

A high-interest rate can lead to a debt trap by making repayments greater than the borrower's income, consuming much of their earnings.

What types of risks can credit create for borrowers?

Credit with high risks, especially with high-interest rates, can lead to a debt trap where the borrower cannot repay, further worsening their financial situation.

How does money solve the problem of double coincidence of wants?

Money allows transactions without needing a matching buyer/seller for bartered goods. For example, one can sell rice for money, then use that money to buy other goods.

How do banks mediate between those with surplus money and those who need funds?

Banks accept deposits and use these funds to lend to those who need credit, generating income from the interest rate difference.

What is written on the top of a 10 rupee note in India, and what does it signify?

“Reserve Bank of India” and “Guaranteed by the Central Government” are written, indicating that the RBI issues currency on behalf of the government.

Why is expanding formal sources of credit important in India?

Expanding formal credit sources reduces reliance on high-interest informal loans, enabling fairer, more affordable loans that support economic growth.

Describe the purpose and function of Self Help Groups (SHGs) for the poor in India.

SHGs are formed to aid the rural poor, particularly women, by pooling savings to offer small loans at low interest, fostering small business opportunities and economic independence.

Why might banks be reluctant to lend to certain borrowers?

Banks may hesitate due to borrowers' lack of required documents, irregular income, being marked as Non-Performing Assets (NPAs), or high business risks associated with entrepreneurs.

How does the RBI supervise the functioning of banks?

The RBI ensures banks maintain adequate cash reserves, fairly distribute loans to various sectors, and adhere to regulated interest rates.

Why is credit important for development?

Credit enables investments in farming, small industries, and business, allowing individuals to adopt modern practices, ultimately boosting economic growth and development.

What factors should Manav consider when deciding between a bank loan and borrowing from a moneylender?

Manav should compare interest rates, eligibility, required documentation, and repayment terms to make an informed choice.

Why are banks sometimes unwilling to lend to small farmers in India?

Banks may consider lending to small farmers risky due to potential crop failures and lack of proper documentation.

What are other credit sources available to small farmers apart from banks?

Small farmers often rely on informal sources like moneylenders or agricultural traders when unable to secure bank loans.

How can the terms of credit be unfavorable to small farmers?

High-interest loans with strict repayment schedules can trap small farmers in debt, especially when crops fail.

Suggest ways small farmers can access affordable credit.

Expanding access to formal credit sources, such as cooperative societies or microfinance, can help small farmers secure low-interest loans.