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Money and Credit – Class 10 Social Science notes, important questions and MCQs

NCERT Class 10 Social Science, chapter 20. Notes, key terms, important questions with answers and MCQs.

Chapter overview

Money acts as a medium of exchange and removes the need for double coincidence of wants. Modern money includes currency and bank deposits. Banks and other lenders provide credit, and the terms of credit decide whether a loan helps or traps the borrower. Formal credit should reach the poor.

Money as a medium of exchange

In a barter system, both parties must want what the other has (double coincidence of wants); money removes this problem.
Modern forms of money are currency (paper notes and coins issued by the Reserve Bank of India) and deposits with banks.
Demand deposits can be withdrawn on demand and used for payments by cheque; they are accepted widely as a means of payment.

Loan activities of banks

Banks keep only a small part of deposits as cash (about 15 per cent in India) and use most of the deposits to give loans.
Banks charge a higher interest rate on loans than they pay on deposits; the difference is their main source of income.
Terms of credit include the interest rate, collateral, documentation and mode of repayment.

Formal and informal credit

Formal sources: banks and cooperatives, supervised by the Reserve Bank of India.
Informal sources: moneylenders, traders, employers, relatives and friends; no organisation supervises them and interest rates are often very high.
High-cost informal loans can lead to a debt trap; formal credit is cheaper but the poor often lack collateral.
Self Help Groups of 15–20 members, mostly women, save regularly and take small loans; the Grameen Bank of Bangladesh, started by Muhammad Yunus, is a successful example.

Key terms

Double coincidence of wants: a situation in which both parties want to buy what the other wants to sell
Collateral: an asset that a borrower owns and pledges to the lender as a guarantee until the loan is repaid
Demand deposits: bank deposits that can be withdrawn on demand
Debt trap: a situation in which a borrower cannot repay a loan and has to borrow more, getting deeper into debt

Important questions with answers

What is a debt trap?2 marks

A debt trap is a situation in which a borrower is unable to repay a loan because of failure of the crop or business, and has to sell part of his assets or take a fresh loan to repay it. The borrower gets deeper into debt, and credit leaves him worse off than before.

What are the terms of credit? Explain with an example.3 marks

Terms of credit are the conditions on which a loan is given: the interest rate, collateral, documentation required and the mode of repayment. For example, a farmer taking a bank loan may have to pay 10 per cent interest per year, pledge land papers as collateral, submit identity and land records, and repay in instalments after the harvest. The terms vary from lender to lender and depend on the nature of the borrower and lender.

Why should formal credit be expanded in India? Explain the role of Self Help Groups.5 marks

Informal lenders such as moneylenders charge very high interest rates and there is no organisation to supervise them; they may use unfair means to recover loans. A large part of what borrowers earn goes to repay loans, leaving less for them, and many fall into a debt trap. Cheap and affordable credit is crucial for development, because it allows people to grow crops, run businesses, set up small industries and trade. Formal sources such as banks and cooperatives charge lower interest and are supervised by the Reserve Bank of India, so they must reach more people, especially the rural poor. Self Help Groups help here: 15–20 members, usually women from one locality, pool their savings and give small loans to members at reasonable interest. After regular saving for a year or two, the group becomes eligible for bank loans in its name, without collateral. SHGs help women become financially self-reliant, give them a platform to discuss social issues and reduce dependence on moneylenders.

Quick revision

Money removes the need for double coincidence of wants.
RBI issues currency and supervises banks.
Banks keep about 15 per cent of deposits as cash.
SHGs and Grameen Bank give credit to the poor.

Exam tips

In credit questions, always explain the role of collateral and interest rate.
Compare formal and informal sources in a table: supervision, interest rate, collateral.

Practice MCQs

Currency notes in India are issued by the
1. Reserve Bank of India
2. State Bank of India
3. Ministry of Finance alone
4. Supreme Court
Show answer
Answer: (a) Reserve Bank of India. The RBI issues currency on behalf of the government.
An asset pledged by a borrower to get a loan is called
1. collateral
2. interest
3. deposit
4. cheque
Show answer
Answer: (a) collateral. The lender can sell it if the loan is not repaid.
Barter needs
1. a cheque
2. double coincidence of wants
3. a bank account
4. currency
Show answer
Answer: (b) double coincidence of wants. Both parties must want each other's goods.
Which of these is a formal source of credit
1. cooperative society
2. moneylender
3. relative
4. trader
Show answer
Answer: (a) cooperative society. Cooperatives are supervised by the government.
The main source of income of banks is
1. the difference between interest on loans and on deposits
2. fees on cheques
3. printing money
4. selling land
Show answer
Answer: (a) the difference between interest on loans and on deposits. Banks charge more on loans than they pay on deposits.
A Self Help Group usually has
1. 2–3 members
2. 15–20 members
3. 100 members
4. 500 members
Show answer
Answer: (b) 15–20 members. Members save regularly and lend to each other.
Why is informal credit often harmful to poor borrowers
1. It is supervised by the RBI
2. It needs no repayment
3. Interest rates are high and there is no supervision, which can lead to a debt trap
4. It is always interest-free
Show answer
Answer: (c) Interest rates are high and there is no supervision, which can lead to a debt trap. High repayments can leave borrowers worse off.
The Grameen Bank of Bangladesh was started by
1. Muhammad Yunus
2. Amartya Sen
3. Raghuram Rajan
4. Ela Bhatt
Show answer
Answer: (a) Muhammad Yunus. He received the Nobel Peace Prize in 2006.

All chapters of Class 10 Social Science

Written by Kundali IQ from standard, well-established facts to help with revision. This is not an official NCERT publication; always read your textbook too.