Cheap and affordable credit plays a crucial role for the country’s development. There is a huge demand for loans for various economic activities. The credit helps people to meet the ongoing expenses of production and thereby develop their business. Many people could then borrow for a variety of different needs. They could grow crops, do business, set up industries etc. In this way credit plays a vital role in the development of a country.

Manav will decide whether to borrow from the bank or the money lender on the basis of the following terms of credit:
→ Rate of interest
→ Requirements availability of collateral and documentation required by banker.
→ Mode of repayment.
Depending on these factors and of course, easier terms of repayment, Manav has to decide whether he has to borrow from the bank or the moneylender.

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) Bank loans require proper documents and collateral as security against loans. But most of the times the small farmers lack in providing such documents and collateral. Besides, at times they even fail to repay the loan in time because of the uncertainty of the crop. So, banks might be unwilling to lend to small farmers.

(b) Apart from bank, the small farmers can borrow from local money lenders, agricultural traders, big landlords, cooperatives, SHGs etc.

(c) The terms of credit can be unfavorable for the small farmer which can be explained by the following -
Ramu, a small farmer borrows from a local moneylender at a high rate of interest i.e. 3 per cent to grow rice. But the crop is hit by drought and it fails. As a result Ramu has to sell a part of land to repay the loan. Now his condition becomes worse than before.

(d) The small farmers can get cheap credit from the different sources like – Banks, Agricultural Cooperatives, and SHGs.

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) poor
(ii) high
(iii) Reserve Bank of India
(iv) deposits
(v) Collateral

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.
ANS (b) Members.

(ii) Formal sources of credit does not include
(a) Banks.
(b) Cooperatives.
(c) Employers.
ANS (c) Employers.

1. The exchange of goods for goods is:
 (i) banker of option (ii) bills of exchange (iii) barter (iv) currency

2. Currency is issued by:
(i) RBI on behalf of central government (ii) By president of India.
(iii) By finance minister (iv) None of them

3. National Sample Survey Organization is a :
(i) Commercial bank organization (ii) An organization of World Bank
(iii) An organization associated with Indian Standard. Institute
(iv) An institution responsible to collect data on formal sector credit.

4. Gold mohar, a coin so named was brought in circulation by:
(i) Akbar (ii) Sher Shah Suri (iii) Ashok (iv) Shivaji

5. Which agency is not included in informal loan sector or agency:
(i) Bank (ii) Village money lender (iii) Trader (iv) Relative of borrower

6. In SHG most of the decisions regarding savings and loan activities are taken by:
(i) Bank (ii) Members (iii) Non-government organizations (iv) LIC

7. Formal sources of credit does not include:
(i) Banks (ii) Co-operatives (iii) Employers (iv) LIC

8. Security (pledge, mortgage) against loan:
(i) Collateral (ii) Token Coins (iii) Promissory Note (iv)Currency

Answer Key of MCQ:1(iii) 2(i) 3(iv) 4(i) 5(i) 6(ii)

Meaning of money: Money may be anything chosen by common consent as a medium of exchange and measure of value.

Functions of money:
(A) Primary functions:
(a) Medium of exchange (b) Medium of value

(B) Secondary functions:
(a) Store of value (b) Standard of deferred payments (c) Transfer of value

(C) Contingent functions:
(a) Basis of credit (b) Liquidity (c) Maximum utilization of resources
(d) Guarantor of solvency (e) Distribution of National Income

(a) India has adopted a representative paper currency or the managed currency standard.
 (b) The monetary standard is synonymous with the standard money adopted. Paper currency in India is the unlimited legal tender i.e. it is used to settle debts and make payments against all transactions.
 (c) RBI (The Reserve Bank of India) issues all currency notes and coins except one rupee notes and coins which are issued by the ministry of finance.
 (d) The system governing note issues the minimum reserve system viz. certain quantity of gold is kept in reserve.