Money and Credit — Class 10 Social Science
Economics — Understanding Economic Development · Chapter 3
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Chapter summary
Key ideas & terms
- Barter system
- A system of exchanging goods directly without using money.
- Double coincidence of wants
- When both parties want exactly what the other offers in barter.
- Demand deposits
- Bank deposits that can be withdrawn on demand and used as money.
- Collateral
- An asset a borrower pledges to the lender as a guarantee for a loan.
- Formal sources of credit
- Banks and cooperatives that lend at regulated, reasonable rates.
- Informal sources of credit
- Moneylenders and traders who lend at high, unregulated rates.
- Self-help group
- A small group that pools savings and gives small loans to its members.
- Reserve Bank of India
- The central bank that issues currency and supervises banks.
Extra questions & answers
How does money solve the problem of barter?
Money acts as a medium of exchange, removing the need for a double coincidence of wants, since people can sell goods for money and use money to buy what they need.
What are the terms of credit?
They include the interest rate, the collateral required, the documentation needed and the mode and time of repayment that a lender sets for a borrower.
Why is cheap and affordable credit important for development?
It helps people invest in farming, business and trade, raises incomes and supports growth, while costly informal credit can trap borrowers in debt.
How do self-help groups help the poor?
They pool members’ small savings and provide affordable loans without collateral, helping the poor — especially women — become self-reliant and avoid moneylenders.
Why do banks keep only a part of deposits as cash?
Because only some depositors withdraw money at any time, so banks use the major portion to give loans, earning interest and providing credit to the economy.
How does money solve the problem of barter?
Money acts as a medium of exchange, removing the need for a double coincidence of wants, since people can sell goods for money and use it to buy what they need.
What are the terms of credit?
The interest rate, the collateral required, the documentation needed and the mode and time of repayment that a lender sets for a borrower.
Why is cheap and affordable credit important for development?
It helps people invest in farming, business and trade, raises incomes and supports growth, whereas costly informal credit can trap borrowers in debt.
How do self-help groups help the poor?
They pool members’ small savings and provide affordable loans without collateral, helping the poor — especially women — become self-reliant and avoid moneylenders.
Distinguish between formal and informal sources of credit.
Formal sources like banks and cooperatives are supervised by the RBI and charge reasonable interest, while informal sources like moneylenders charge high, unregulated rates.
LET’S WORK THESE OUT
1. How does the use of money make it easier to exchange things?
Money acts as a common medium of exchange. A person can sell a good or service for money and then use that money to buy whatever is needed. This removes the need to find two people whose wants match exactly.
2. Can you think of some examples of goods / services being exchanged or wages being paid through barter?
Examples include a farmer giving grain to a tailor for stitching clothes, a dairy farmer supplying milk to a shopkeeper in return for groceries, or an agricultural labourer receiving part of the wage in wheat or rice instead of money.
LET’S WORK THESE OUT
1. M. Salim wants to withdraw Rs20,000 in cash for making payments. How would he write a cheque to withdraw money?
Salim would write “Self” in the payee space, enter the date, write Rs20,000 in figures and “Rupees Twenty Thousand Only” in words, and sign the cheque as recorded with the bank.
2. Tick the correct answer.
After the transaction between Salim and Prem,
(i) Salim’s balance in his bank account increases, and Prem’s balance increases.
(ii) Salim’s balance in his bank account decreases and Prem’s balance increases.
(iii) Salim’s balance in his bank account increases and Prem’s balance decreases.
(ii) Salim’s balance in his bank account decreases and Prem’s balance increases.
3. Why are demand deposits considered as money?
Demand deposits can be withdrawn whenever required and can be used directly to make payments through cheques or electronic transfers. Since they are widely accepted for settling transactions, they function as money.
LET’S WORK THESE OUT
1. Fill the following table.
Salim Swapna
Why did they need credit?
What was the risk?
What was the outcome?
Salim needed credit to buy raw materials and hire workers for a large shoe order. His risk was that he might fail to complete or sell the order, but he completed it, earned a profit and repaid the loans. Swapna needed credit for crop cultivation. Her risk was crop failure due to pests and other farming uncertainties; the crop failed, her debt increased and she had to sell part of her land.
2. Supposing Salim continues to get orders from traders. What would be his position after 6 years?
If Salim continues receiving orders and completes them successfully, repeated productive use of credit could raise his income and allow him to expand his business, employ more workers, build savings and become less dependent on borrowing.
3. What are the reasons that make Swapna’s situation so risky? Discuss factors – pesticides; role of moneylenders; climate.
Swapna’s farming depends on uncertain natural conditions and is exposed to pests and crop failure. Expensive pesticides raise her costs without guaranteeing success. Since she borrows from a moneylender at costly terms and lacks protection against crop loss, failure makes repayment impossible and pushes her into a debt trap.
A House Loan
Fill the following details of Megha’s housing loan.
Loan amount (in Rupees)
Duration of loan
Documents required
Interest rate
Mode of repayment
Collateral
Loan amount: Rs5 lakhs. Duration: 10 years. Documents required: employment records and salary documents. Interest rate: 12% per annum. Mode of repayment: monthly instalments. Collateral: the papers of the new house.
LET’S WORK THESE OUT
1. Why do lenders ask for collateral while lending?
Collateral gives the lender security against non-repayment. If the borrower fails to repay the loan, the lender can sell the pledged asset to recover the amount due.
2. Given that a large number of people in our country are poor, does it in any way affect their capacity to borrow?
Yes. Poor people often lack assets to offer as collateral, regular income records and the documents required by banks. This reduces their access to formal loans and may force them to borrow from informal lenders at higher interest rates.
3. Fill in the blanks choosing the correct option from the brackets.
While taking a loan, borrowers look for easy terms of credit. This means __________ (low/high) interest rate, ______________(easy/tough) conditions for repayment, ___________(less/more) collateral and documentation requirements.
While taking a loan, borrowers look for easy terms of credit. This means low interest rate, easy conditions for repayment, less collateral and documentation requirements.
LET’S WORK THESE OUT
1. List the various sources of credit in Sonpur.
The sources of credit in Sonpur are moneylenders, agricultural traders, commercial banks, landowner-employers and cooperative societies.
2. Underline the various uses of credit in Sonpur in the above passages.
Credit is used for crop cultivation, buying farm inputs and agricultural implements, agricultural trade, storing produce, meeting daily expenses during periods without work, paying for illness and family functions, fishery, house construction and other needs.
3. Compare the terms of credit for the small farmer, the medium farmer and the landless agricultural worker in Sonpur.
Shyamal, the small farmer, borrows from a trader at 3% per month, receives farm inputs on credit and must sell his crop to the trader after harvest. Arun, the medium farmer, gets a bank loan at 8.5% per annum, repayable within 3 years, on formal terms. Rama, the landless worker, borrows from her employer at 5% per month and repays mainly through labour, often taking a new loan before clearing the old one.
4. Why will Arun have a higher income from cultivation compared to Shyamal?
Arun owns more land, receives a cheaper bank loan, can repay over a longer period and can store his crop until prices improve. Shyamal pays a much higher rate and is forced to sell to the trader immediately after harvest when prices are low.
5. Can everyone in Sonpur get credit at a cheap rate? Who are the people who can?
No. Cheap formal credit is mainly available to people such as Arun who own assets, can provide collateral and satisfy bank requirements. Small farmers and landless labourers usually depend on costly informal lenders.
6. Tick the correct answer.
(i) Over the years, Rama’s debt
• will rise.
• will remain constant.
• will decline.
Rama’s debt will rise.
6. (ii) Arun is one of the few people in Sonpur to take a bank loan because
• other people in the village prefer to borrow from the moneylenders.
• banks demand collateral which everyone cannot provide.
• interest rate on bank loans is same as the interest rate charged by the traders.
Banks demand collateral which everyone cannot provide.
7. Talk to some people to find out the credit arrangements that exist in your area. Record your conversation. Note the differences in the terms of credit across people.
A local shopkeeper said that a bank offered a business loan at a moderate annual interest rate after checking income records and collateral. A domestic worker said that she borrowed a small amount from her employer without documents, but repayment was deducted from her monthly wages. A street vendor borrowed from a moneylender with no collateral but paid a very high weekly interest charge. The arrangements differed in interest rate, documentation, collateral, repayment period and the lender’s power over the borrower.
LET’S WORK THESE OUT
1. What are the differences between formal and informal sources of credit?
Formal sources include banks and cooperatives and are supervised by the Reserve Bank of India. They follow rules, maintain records and generally charge lower interest rates. Informal sources include moneylenders, traders, employers, relatives and friends; they are not supervised, may charge very high interest and may impose unfair conditions.
2. Why should credit at reasonable rates be available for all?
Affordable credit allows people to cultivate crops, run businesses, meet important needs and increase their incomes without losing most of their earnings in interest. It also reduces the danger of debt traps and helps poorer households participate in development.
3. Should there be a supervisor, such as the Reserve Bank of India, that looks into the loan activities of informal lenders? Why would its task be quite difficult?
Yes, supervision could limit excessive interest rates and unfair recovery methods. However, the task would be difficult because informal lenders are numerous, scattered, often unregistered, keep few or no written records and make private agreements that are hard to monitor.
4. Why do you think that the share of formal sector credit is higher for the richer households compared to the poorer households?
Richer households are more likely to have regular incomes, property, collateral, documents and established links with banks. Poor households often lack these and may need small or urgent loans, so they are pushed towards informal lenders.
EXERCISES
1. In situations with high risks, credit might create further problems for the borrower. Explain.
When an activity is risky, its expected income may not be earned. The borrower must still repay the principal and interest, so a failed crop or business can force further borrowing or the sale of assets. Credit can therefore lead to a debt trap instead of improving income.
2. How does money solve the problem of double coincidence of wants? Explain with an example of your own.
Money separates selling from buying. A person can sell a product to anyone willing to pay money and then use that money to buy a different product from someone else. For example, a potter can sell pots for money and use it to buy wheat without finding a wheat farmer who also wants pots.
3. How do banks mediate between those who have surplus money and those who need money?
Banks accept deposits from people with surplus funds, keep a small part as cash and lend the major portion to borrowers. Depositors receive interest, while borrowers pay a higher interest rate. In this way, banks connect savers with people who need credit.
4. Look at a 10 rupee note. What is written on top? Can you explain this statement?
The note carries a promise by the Reserve Bank of India, signed by the Governor, to pay the bearer the value of 10 rupees. This means the note is authorised by the Central Government through the RBI and is accepted as legal currency for payments in India.
5. Why do we need to expand formal sources of credit in India?
Formal credit usually has lower interest rates, regulated conditions and written records. Expanding it would reduce dependence on costly informal lenders, prevent exploitation and debt traps, and enable more people—especially poor households and small producers—to invest and raise their incomes.
6. What is the basic idea behind the SHGs for the poor? Explain in your own words.
A Self Help Group brings together about 15–20 people, usually poor women, who save regularly and lend small amounts to members. A well-functioning group can later borrow from a bank without individual collateral. Group responsibility, regular savings and collective decisions make affordable credit accessible.
7. What are the reasons why the banks might not be willing to lend to certain borrowers?
Banks may refuse borrowers who lack collateral, regular income, proper documents or a reliable repayment record. They may also consider the proposed activity too risky or believe that the borrower will be unable to repay.
8. In what ways does the Reserve Bank of India supervise the functioning of banks?
Why is this necessary?
The RBI checks whether banks maintain the required cash balance and collects information about how much they lend, to whom and at what interest rates. It also ensures that banks lend to small cultivators, small industries and other priority borrowers, not only to large profitable businesses. Such supervision protects depositors, supports fair lending and keeps the banking system stable.
9. Analyse the role of credit for development.
Credit supports development when it finances productive activities such as cultivation, trade, small industries and self-employment, allowing people to complete production and increase earnings. Its effect depends on risk and terms: affordable, well-timed credit can improve livelihoods, while costly credit under uncertain conditions can cause debt traps. Development therefore requires wider access to fair formal credit.
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.
Manav should compare the interest rate, total repayment amount, repayment period, instalment schedule, collateral and documentation requirements, speed of obtaining the loan and any additional conditions. A bank loan is preferable if he qualifies because it is usually cheaper and regulated. A moneylender may be quicker and require less documentation, but may charge much more and impose unfair terms.
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?
Small farmers may lack sufficient collateral, stable income and documents. Their repayment depends on an uncertain harvest, so banks may consider the loan risky.
11. (b) What are the other sources from which the small farmers can borrow?
They can borrow from moneylenders, agricultural traders, landlords, employers, relatives, friends, cooperatives and Self Help Groups.
11. (c) Explain with an example how the terms of credit can be unfavourable for the
small farmer.
A trader may lend farm inputs at 3% interest per month and require the farmer to sell the crop to the trader immediately after harvest. The farmer then pays high interest and receives a low crop price, so much of the income goes to the lender.
11. (d) Suggest some ways by which small farmers can get cheap credit.
Banks and cooperatives can open more rural branches, simplify documentation, provide crop loans at reasonable rates, accept suitable alternatives to traditional collateral and expand SHG-based lending. Crop insurance and timely government-supported credit can also reduce risk.
12. Fill in the blanks:
(i) Majority of the credit needs of the _________________households are met
from informal sources.
poor
12. (ii) _________costs of borrowing increase the debt-burden.
High
12. (iii) __________________ issues currency notes on behalf of the Central
Government.
Reserve Bank of India
12. (iv) Banks charge a higher interest rate on loans than what they offer on
.
deposits
12. (v) _______________ is an asset that the borrower owns and uses as a guarantee
until the loan is repaid to the lender.
Collateral
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.
(b) Members.
13. (ii) Formal sources of credit does not include
(a) Banks.
(b) Cooperatives.
(c) Employers.
(c) Employers.
ADDITIONAL PROJECT / ACTIVITY
The following table shows people in a variety of occupations in urban areas. What
are the purposes for which the following people might need loans? Fill in the column.
Occupations Reason for needing a Loan
Construction worker
Graduate student who is computer literate
A person employed in government service
Migrant labourer in Delhi
Household maid
Small trader
Autorickshaw driver
A worker whose factory has closed down
Construction worker — tools, rent, medical expenses or household needs during periods without work. Graduate student who is computer literate — higher education, a computer or starting a small technology service. A person employed in government service — housing, vehicle, education or another major planned expense. Migrant labourer in Delhi — travel, rent, food, medical needs or support for family members. Household maid — medical treatment, education, housing repairs or household emergencies. Small trader — stock, equipment, shop rent or working capital. Autorickshaw driver — purchase or repair of an autorickshaw, permit fees or fuel-related working expenses. A worker whose factory has closed down — daily living expenses, retraining or starting a small self-employment activity.
Next, classify the people into two groups based on whom you think might get a bank
loan and those who might not. What is the criterion that you have used for classification?
Likely to get a bank loan: the graduate student with a viable education or business plan, the government employee, the established small trader and an autorickshaw driver who can provide documents, income proof or collateral. Less likely to get a bank loan: the construction worker, migrant labourer, household maid and worker whose factory has closed down, especially if they lack regular income, collateral and records. The criterion is the bank’s assessment of repayment capacity, including stable income, employment, documents, collateral, credit history and the purpose and risk of the loan.