Test: Money & Credit - 2 - UPSC MCQ

Correct answer is D: A is wrong but R is correct
Self-Help Groups (SHGs) are informal associations of people who choose to come together to find ways to improve their living conditions. It can be defined as self governed , peer controlled information group of people with similar socio-economic background and having a desire to collectively perform common purpose.
Self-Help Groups are emerging as an important source of credit because:
1. They charge less interest on the loans than what the moneylenders charge. The members can take loans from the groups to meet their daily needs
2. All decisions regarding savings and loans are taken by the members of the group.
3. If the group is regular in its savings they can also take loan from the bank. Loan is sanctioned in the name of the group.
4. They help borrowers to overcome the problem of collateral and have freed them from the clutches of the moneylenders.

Organised Credit

• Definition: Organised credit refers to credit that is provided by formal financial institutions such as banks, credit unions, and other regulated financial entities.
• Characteristics: Organised credit is typically regulated by government authorities and follows established lending guidelines.
• Types: Organised credit can take various forms such as loans, lines of credit, and credit cards.
• Benefits: Organised credit offers borrowers access to larger amounts of capital at lower interest rates compared to informal credit sources.
• Usage: Organised credit is often used by businesses to finance investments, by individuals to purchase homes or cars, and by governments to fund public projects.

Barter system

• Definition: The barter system is a system of exchange where goods or services are directly exchanged for other goods or services without using money as a medium of exchange.
• Process: In a barter system, individuals or entities trade goods and services based on mutual agreement without the need for a common currency.

Explanation:

• Currency: Currency refers to the money in circulation that is used as a medium of exchange. It includes both coins and paper notes.
• Paper notes: Paper notes are a common form of currency used for transactions in many countries
• Coins: Coins are another form of currency that is used for smaller transactions and as change
• Gold: Gold is not a modern form of money. While it has been used as a form of currency in the past, gold is not commonly used as a medium of exchange in today's economy.

Explanation:

• Assertion (A) is correct: The rupee is indeed widely accepted as a medium of exchange in India. It is the official currency of the country and is used for all transactions.
• Reason (R) is also correct: The rupee is authorized by the government of India as the legal tender for transactions. It is issued and regulated by the Reserve Bank of India, which is the central monetary authority in the country.
• R is the correct explanation of A: The reason why the rupee is widely accepted as a medium of exchange in India is because it is authorized and backed by the government. The government ensures its stability and acceptance in the economy.
  ​​​​​​​Therefore, option A is the correct choice as both the assertion and reason are true, and the reason is the correct explanation of the assertion.

• RBI: The Reserve Bank of India (RBI) is the central bank of the country and regulates the banking sector in India. It lays down norms and guidelines for all banks operating in the country.


• The correct answer is RBI as it is the regulatory authority that lays down norms for all banks in the country.

Fixed deposits for long period means that the bank would be able to use the money for more profit and thus would give a higher rate of interest.

• Authority: The Reserve Bank of India (RBI) is the sole institution in India authorized to issue currency notes.


• Responsibility: RBI is responsible for the design, production, and distribution of currency notes in India.


• Regulation: RBI also regulates the circulation of currency to maintain stability in the financial system.


• Legal Status: The RBI Act, 1934 gives the Reserve Bank of India the legal authority to issue currency notes in the country.

• Assertion (A) is correct: The credit activities of the informal sector should be discouraged. Informal sector credit often operates outside the purview of regulations and can lead to exploitation of borrowers through high interest rates and unfair practices.


• Reason (R) is true: Getting a loan from a bank is indeed more difficult than taking a loan from informal resources. Banks have stringent eligibility criteria, documentation requirements, and may require collateral, making it harder for individuals, especially those in the informal sector, to access credit.


• R is not the correct explanation of A: While it is true that getting a loan from a bank is more difficult, the reason alone does not explain why credit activities of the informal sector should be discouraged. The primary reason to discourage informal sector credit is to protect borrowers from predatory practices and ensure financial inclusion and stability.

• Assertion (A) is correct: The rupee is indeed widely accepted as a medium of exchange in India. It is the official currency of the country and is used for all transactions.
• Reason (R) is also correct: The rupee is authorized by the government of India as the legal tender for transactions. It is issued and regulated by the Reserve Bank of India, which is the central monetary authority in the country.
• R is the correct explanation of A: The reason why the rupee is widely accepted as a medium of exchange in India is because it is authorized and backed by the government. The government ensures its stability and acceptance in the economy.
  Therefore, option A is the correct choice as both the assertion and reason are true, and the reason is the correct explanation of the assertion.

Banks play a crucial role in the economy by utilizing deposits to extend loans, which helps in generating profits, meeting financial needs, promoting economic growth, managing risks, and complying with regulatory requirements. 

• As deposits: One of the most common ways people hold money with banks is by depositing it in their accounts. This money can be easily accessed through various methods such as ATM withdrawals, online transfers, and checks.


• As collateral: In some cases, people may hold money with banks as collateral for loans or other financial transactions. This provides security to the lender in case the borrower defaults on their obligations.


• As security: Banks also offer various financial products that allow people to hold money as security, such as certificates of deposit or money market accounts. These accounts typically offer higher interest rates but may have restrictions on access to the funds.

• Assertion (A) is true: The Reserve Bank of India (RBI) is the central bank of India and it plays a crucial role in supervising the functioning of formal sources of loans in the country. It regulates and supervises the banking sector, including banks and financial institutions, to ensure stability and efficiency in the financial system.
• Reason (R) is true: The RBI is indeed authorized to issue currency notes in India. It is the sole authority responsible for the issuance and distribution of currency notes in the country. This power is granted to the RBI under the Reserve Bank of India Act, 1934.
• Explanation of the relationship between A and R: While both the assertion and reason are true, the reason does not directly explain why the RBI supervises the functioning of formal sources of loans in India. The issuance of currency notes is just one of the many responsibilities of the RBI, and its supervision of formal sources of loans is a separate function aimed at ensuring the stability and regulation of the financial sector.
  Therefore, option B: Both A and R are true but R is not the correct explanation of A is the correct choice in this case.

• Cooperative societies can include farmers, workers, women, and other groups working together towards common goals.
• By pooling resources, sharing risks, and collaborating, they can achieve greater success and benefit their members.
• By forming cooperative societies, different groups can work together towards common goals, promote economic empowerment, and support each other in various ways.
• These societies exemplify the principles of cooperation, mutual assistance, and shared benefits.

• The cash reserves ratio is a requirement set by central banks that determines the minimum amount of cash reserves that banks must hold as a percentage of their total deposits.


• This ratio is set to ensure that banks have enough liquidity to meet the demands of their depositors and to maintain financial stability.


• By keeping a certain percentage of deposits as cash reserves, banks can ensure that they are able to honor withdrawals and other obligations.

• Medium of exchange: Money acts as a medium of exchange, facilitating the buying and selling of goods and services.


• Components of money: Money includes paper notes, coins, and demand deposits. Paper notes and coins are physical forms of money, while demand deposits are funds held in checking accounts that can be accessed for payment by check or electronic transfer.


• Utility: Money's utility lies in its ability to serve as a widely accepted medium of exchange and store of value. It enables individuals to trade goods and services efficiently and contributes to the functioning of the economy.


• Legal tender: Money, especially paper notes and coins issued by the government, is considered legal tender for settling debts and making payments.

• Definition: Chit funds are informal savings schemes where a group of individuals come together to contribute a fixed amount of money periodically. This money is then given to one member of the group in a rotating manner.


• Regulation: Chit funds are not regulated by any financial authority in most countries, making them a part of the unorganised credit sector.


• Risk: Chit funds are riskier than traditional banking systems as they do not have any legal framework to protect the investors.


• Informal Nature: Chit funds operate on trust and mutual understanding among the members, without any formal documentation or legal backing.


• Usage: Chit funds are commonly used by individuals who do not have access to formal banking services or who prefer a more flexible and informal savings scheme.

• RBI: The Reserve Bank of India is the institution responsible for issuing currency notes on behalf of the Central Government in India.


• SBI: State Bank of India is a major public sector bank in India and is not responsible for issuing currency notes.


• ICICI: ICICI Bank is a private sector bank in India and does not have the authority to issue currency notes.


• President: The President of India does not have the authority to issue currency notes. It is the Reserve Bank of India that has this responsibility.

Calculation of Percentage of Formal Sector in Total Credit in India in Poor Household

• Total Credit: Let's assume the total credit in poor households in India is 100 units.
• Formal Sector Credit: Out of the total credit, 20 units are from the formal sector.
• Percentage Calculation: To find the percentage of formal sector credit, we need to divide the formal sector credit by the total credit and then multiply by 100.
  • Percentage = (Formal Sector Credit / Total Credit) * 100
  • Percentage = (20 / 100) * 100 = 20% Therefore, the percentage of formal sector credit in total credit in poor households in India is 20%.
    
     

Features of SHG :

(iii) After a year or two, if the group is regular in savings, it becomes eligible for availing loan from the bank.

(iv) In a SHG (Self Help Group) important decisions in regard to loan and savings are taken by group members.

• Self Help Groups issue loans at reasonable rate of interest.

• SHG is a mutual help group who provide support among themselves.
• They come together to solve their economic issues and earn income.