MONEY AND CREDIT
1. How does a bank work as a key component of the financial system? Explain. [Term-II,
2021-22]
Ans: Banks mediate between those who have surplus funds (the depositors) and those
who are in need of these funds (the borrowers). People need small amount of money for
their day-to-day needs and deposit the surplus amount in the bank. Bank accepts the
deposit and also pay an amount of interest on the deposits. In this way people’s money is
safe and earns an amount as an interest. Bank use the major portion of the deposits to
meet the loan requirements of the people.
2. Explain any three functions of the Reserve Bank of India. [2023, Al 2019]
Ans: The Reserve Bank of India has many important roles that affect the common public:
RBI monitors the balance kept by the bank for day to day transactions. RBI
monitors the banking activity, particularly the loan-giving activity of the banks.
It ensures that the banks give loans to the priority sector like agriculture and not
just to profit-making sectors.
The RBI undertakes the responsibility of controlling credit created by the
commercial banks.
RBI uses quantitative and qualitative techniques to control and regulate the credit
flow. This includes interest rates and the percentage of loans to a sector.
The RBI gives guidelines to the bank about setting up the terms of credit that the
bank may decide upon for the borrowers.
3. Justify the role of 'Self Help Groups’ in the rural economy. [2023]
Ans:
(i) SHGs have emerged as building blocks of the rural poor as it is the group as a
whole which is responsible of the repayment of the loan. In case of non-
repayment, it is taken up in a serious manner by the group members.
(ii) The SHGs are organisations of the rural poor people especially women. They
provide small loans on reasonable rates.
(iii) The members of SHGs pool their savings and take loans at nominal rates of
interests.
(iv) This creates self employment opportunities for the members particularly rural poor
women.
(iv) The SHGs help poor borrowers to overcome the problem of lack of collateral.
4. Describe the bad effects of informal sources of credit on borrowers. [Delhi 2019]
Ans:
The informal sector consists of money lenders, traders, employers, friends,
relatives, merchants, and landlords. There is no organization that supervises the
credit activities of lenders in the informal sector.
The informal lenders usually charge a very high rate of interest. A higher cost of
borrowing is often detrimental to the borrower. It usually results in a debt trap for
the borrower.
The borrower is seldom able to escape the never-ending cycle of loan
repayment. Most loans from informal lenders carry a very high-interest rate and
have other stringent conditions.
They do little to increase the income of the borrowers. It has been observed that
the loan recovery mechanics in the informal sector are particularly harsh in cases
of loan repayment default.
There have been cases of selling of properties at throwaway prices and total loss
of belongings and even suicides.
5. Describe the importance of formal sources of credit in economic development. [Delhi
2019]
Ans: The formal source of credit comprises of banks and cooperative societies. The
Reserve Bank of India supervises the functioning of formal sources of loans. The
importance of formal sources of credit in economic development are:
Even though collateral and paperwork are needed to secure a loan from banks,
the interest rates here are lesser than informal sources.
The formal sources of credit are part of the greater national economy. Hence
even small borrowers should try to avail this facility and not go for informal
sources of borrowing.
The role of formal sources of credit has been very great, particularly for financing
large developmental projects and various business projects in the private sector
and the public sector.
