D.P.S-M.I.

S-DOHA, QATAR
NOTES-ECONOMICS
CLASS: X
Chapter 3 Money and Credit
Money: Money may be defined as anything which is generally accepted by
the people in exchange of goods and services or in repayment of debts.
Barter System: It implies direct exchange of goods against goods without
use of money is called barter exchange. It is also called C.C. economy
(Commodity for commodity exchange economy).Demand Deposits:
Deposits in a bank which are payable on demand are called demand
deposits. It also provides the facility of medium of exchange which is a
function of money, when payments are made by cheques. Cheque: It is a
paper instructing the bank to pay a specific amount from the persons
account to the person in whose name the cheque has been made. Formal
Sector Credit in India: It includes loans from banks and cooperatives. RBI
supervises their functions of giving loans. Rich urban households depend
largely on formal sources of credit. Lower rate of interest on loans is
charged as compared to informal sources of credit.
Informal Sector Credit in India: It includes traders, employers,
moneylenders, relatives, friends, etc. No organization is there to supervise
its lending activities. Higher interest on loans is charged as compared to
formal sources of credit. Poor households largely depend on informal
sources of credit.Self Help Groups (SHG): It helps in pooling the saving of
the members, who are poor women. Members can get timely loans for a
variety of purpose and at a reasonable rate of interest. It helps borrowers to
overcome the problem of lack of collateral. It also provides a platform to
discuss variety of social issues of their concern.Chit fund: Chit means a
transaction under which a person enters into an agreement with a specified
number of persons that every one of them shall subscribe a certain amount
of money by ways of periodic installments over a definite period.

Reasonable rate of interest is charged against the loan taken by subscriber

members.
Q. 1. Why are demand deposits considered as money?
Ans. Deposits in a bank which are payable on demand are called demand
deposits. It also provides the facility of medium of exchange which is a
function of money, when payments are made by cheques
Q. 2. What are the limitations of the barter system?
i ).Two people with different type of needs and goods must be there to
satisfy each others needs.
ii). There are many products which cannot be divided.
iii). Valuation of goods is very difficult.
iv). Barter system is consumable.
Q. 3 . What are demand deposits? What are their advantages? Why
are demand deposits considered as money?
Ans. The deposits in the bank accounts which can be withdrawn on
demand are known as demand deposits.
i). People earn interest on the demand deposits.
ii). The depositor can make the payment through a cheque.
It is considered as money :
i). They can be used as a medium of exchange.
ii). They are easily acceptable.
iii). They help in settling payment without the use of cash.
Q. 4. What are the advantages of depositing money in the banks?
Ans.i). It is the safer place to keep money as compared to the house or a
working place.
ii). People can earn interest on the deposited money.
iii). People have the provisions to withdrawn the money as and when they
require.
iv). People can also make payment through cheques.
Q. 5. What is collateral?

Ans. i). Collateral is an asset that the borrower owns (such as land,
building, vehicles, livestock, deposits with banks) and uses this as a
guarantee to a lender until the loan is repaid.
ii). If the borrower fails to repay the loan, the lender has the right to sell the
asset or the collateral to obtain the payment.
Property such as land, livestock etc are some of the common examples of
collateral used for borrowing.
Q. 6. RBI plays a crucial role in controlling the formal sector loans.
Explain.
Ans. i). The formal resource work under the supervision of the Reserve
Bank of India or the RBI. The RBI monitors that the banks actually maintain
the cash balance.
ii). The RBI sees that the banks give loans not just to profit making
business and trade, but also provide loans to small cultivators, small scale
industries, small borrowers, etc.
iii) The rate of interest of the formal lenders is decided by the RBI. So
normally, the interest rates are very low.
Q. 7. In what ways does the Reserve Bank of India supervise the
functioning of banks? Why is this necessary?
Ans. i).It ensures that the banks actually keep a certain % of their deposits
as cash balance/cash reserve with the Central bank.
ii). It observes that banks give loans to small activators, small scale
industries, small borrowers also and not become a profit making business.
iii). Report has to be submitted periodically by the banks to RBI containing
details such as how much they have lent, to whom and at what rate of
interest etc.
iv). Central Banks is the lender of the last resort. Whenever banks are short
of funds, they can take loans from the Central Banks. Thus it is source of
great strength to the banking system.
Q. 8. Explain the loan activities of banks.
OR
What is the main source of income for the bank?

Ans. i). Banks keep only a small proportion of their deposits as cash with
themselves. This is kept as a provision to pay the depositors who might
come to withdraw money from the bank.
ii). Banks use the major portion of the deposits to extend loans. Banks
make use of the deposits to meet the loan requirements of the people.
iii) In this way, banks mediate between the depositor and borrowers.
iv). Banks charge a higher interest rate on loans than what they offer on
deposits.
v). The difference between what is charged from the borrowers and what is
paid to the depositors is their main source of income.
Q. 10 . Distinguish between formal and informal credit sources.
Ans. Formal Sector
i). These resources work under the supervision of the Reserve Bank of
India (RBI).
ii). They charge low rate of interest.
iii) Collateral is asked
iv) Documentation is required
v) There is long duration of loan
vi) Commercial banks, cooperative, societies etc are the main sources of
formal credit.
Informal Sector
i). These do not work under any government organization.
ii). The rate of interest is very high.
iii) Collateral is not required always.
iv) Documentation is not required
v) There is short duration of loan
vi). Relatives, money lenders and landlords are the main sources of
informal credit.
Q. 11. Most of the poor households are still dependent on informal
sources of credit. Explain.
Ans. i). Banks are not present everywhere in rural India, where as the
informal sources are easily available in all the villages.

ii). Getting a loan from the bank is much more difficult than taking a loan
from the informal resources because bank loans require proper documents
and collateral. Most of the poor people dont possess anything to offer as
collateral.
iii). Moneylenders provide loan to the poor people without any collateral.
iv). The formal sources provide loan only for productive purposes, whereas
the informal sources provide credit for productive and non-productive
purposes.
v). The method of business of the formal source is very complex, whereas
the informal resources have a very simple way of business.
Q.12. Why should credit at reasonable rates be available for all?
Ans. i). Inform credit tries to exploit the poor farmers and workers by
charging a very high rate of interest on loans and imposing unreasonable
terms of credit.
ii). At present rich households avail the benefits of formal credit and poor
have to depend on the informal sources due to some weak point like
absence of collateral security etc.
iii). Therefore it should be ensured that formal credit should provide credit
at reasonable rates to all and especially poor ones to help them fulfill their
needs.