Short Answer Questions: Money & Credit

Q1. Can everyone in Sonpur get credit at a cheap rate? Which people can get such credit?
Ans: No, not everyone in Sonpur can access cheap credit. Typically, the following groups are eligible:

• Medium farmers who are literate and can complete the required paperwork.
• Farmers who own their land and can offer it or other assets as collateral.

These individuals are more likely to receive loans at lower interest rates from banks because they can provide security, maintain records, and satisfy lenders about timely repayment.

Q2. Write two main functions of a commercial bank.
Ans: Two main functions of a commercial bank:

• Accepting deposits: Commercial banks take money from individuals and firms, providing a safe place for savings and current balances. Depositors can withdraw money when needed.
• Providing loans: They lend money to farmers, entrepreneurs and businesses, helping them to start or expand activities and supporting production and trade.

Q3. Why should credit at reasonable rates be available for all?

Ans: If credit is available at a reasonable rate, it helps people to increase their incomes and improve livelihoods. Affordable credit allows individuals to:

• Borrow for productive needs such as buying seeds and fertilisers, starting small industries, or running a shop.
• Invest in tools or machines that raise output and reduce labour time.
• Avoid expensive informal loans and thus keep more of their earnings.

Overall, reasonable credit widens opportunities for work and investment and supports steady economic development.

Q4. What do you understand by "terms of credit"?
Ans: The terms of credit are the conditions on which a loan is given. These include:

• Interest rate: The percentage charged on the borrowed amount.
• Collateral: Assets offered to secure the loan, if required.
• Documentation requirements: Papers and proofs the lender asks for to process the loan.
• Mode of repayment: When and how the borrower must repay the loan (installments, seasonal payments, etc.).

Favourable terms mean lower cost and easier repayment, while strict terms make borrowing more difficult or expensive.

Q5. How is credit helpful for the country's development?
Ans: Credit supports a country's development in several ways:

• It enables producers and firms to meet working and capital expenses so production can continue without interruption.
• Timely credit helps complete production on schedule, increasing output and incomes.
• Access to loans increases the scale of economic activity and trade, raising overall economic growth.
• Credit also creates employment by allowing businesses to expand and start new ventures.

Together these effects improve living standards and strengthen the economy.

Q6. What is the basic idea behind the SHG's for the poor? Explain in your words.
Ans: The basic idea behind Self Help Groups (SHGs) is to provide easy access to small loans for poor people through collective saving and lending. Key points are:

• A typical SHG has 15-20 members from the same neighbourhood who meet regularly.
• Members save small amounts every week or month, for example Rs 25 to Rs 100 or more, creating a common fund.
• The pooled savings are used to give loans to members for purposes like small businesses, health, or education.
• The group decides loan terms, interest and repayment, and members support each other to ensure repayments are made.

SHGs promote financial inclusion and empower members, especially women, by building credit history and encouraging entrepreneurship with minimal formal documentation.

Q7. Why do we need to expand formal sources of credit in India?
Ans: Expanding formal sources of credit in India is necessary because:

• Lower Interest Rates: Banks and formal lenders provide loans at much cheaper rates than informal moneylenders.
• Higher Incomes: Affordable credit helps borrowers invest in productive activities that increase their earnings and ability to repay.
• Greater Production: More formal credit raises the level of production and trade, contributing to national growth.
• Reduced Exploitation: Wider formal credit reduces dependence on costly informal loans, protecting poor households from high interest and unfair terms.

Overall, expanding formal credit promotes stable, inclusive and sustainable development.

Q8. What is the main source of income for banks?
Ans: The main source of income for banks is the difference between the interest rate they charge on loans and the rate they pay on deposits. In practice:

• Banks accept deposits and keep a part as reserves.
• They lend the remaining funds to borrowers at a higher interest rate.
• The difference between the lending rate and the deposit rate is the bank's primary income.

This margin helps banks cover costs and earn profit; banks also earn some income from fees and charges, but interest rate difference is the main source.