Money and Credit

Money plays a central role in our everyday lives. In this chapter you will learn how money acts as a medium of exchange, removing the need for the double coincidence of wants that makes barter difficult. You will trace how money changed from grains and cattle to metallic coins and finally to modern currency issued by the Reserve Bank of India, along with demand deposits in banks that can be used through cheques and digital payments. You will learn how banks use most of their deposits to give loans, and earn from the difference between interest on loans and on deposits. Through the stories of Salim and Swapna, you will see how credit can help a borrower or push them into a debt trap, and study the terms of credit: interest rate, collateral, documentation and mode of repayment. Finally, you will compare formal and informal sources of credit and learn how Self Help Groups and the Grameen Bank of Bangladesh provide credit to the poor.

Detailed Worksheet: Money and Credit Section A - Definitions (10 marks) 1. What is meant by the double coincidence of wants? How does money solve this problem? (2 marks) 2. What are demand deposits? Why are they considered a form of money? (2 marks) 3. Who issues currency notes in India? Why is the rupee accepted as a medium of exchange? (2 marks) 4. Define credit and collateral. (2 marks) 5. What is a Self Help Group? How many members does it usually have? (2 marks) Section B - Calculations and Applications (15 marks) 6. A bank receives deposits of Rs 10 crore and keeps 15% as cash reserves. Calculate the amount available for loans. If the bank pays 6% interest on deposits and charges 10% on loans, calculate its annual income from the difference, assuming all available money is lent. (3 marks) 7. Swapna, a small farmer, borrows Rs 50,000 from a moneylender at 3% per month for one year. Calculate the simple interest she must pay and the total amount due. Compare it with a bank loan at 9% per annum for the same amount and time. (3 marks) 8. An SHG has 15 members, and each saves Rs 200 per month. Calculate the total savings in one year. If the group gives a loan of Rs 20,000 to a member at 2% per month, calculate the interest the group earns in 6 months. (3 marks) 9. A cheque of Rs 25,000 is issued by Mr Sharma to Ms Rao. Mr Sharma's account had Rs 40,000 and Ms Rao's account had Rs 10,000. Calculate the balances in both accounts after the cheque is cleared. Explain why the cheque acts as money. (3 marks) 10. A shopkeeper takes a loan of Rs 2,00,000 from a bank at 12% per annum to buy goods for the festival season. He sells the goods three months later and repays the loan with interest. Calculate the interest for three months and the total repayment. If his profit on the goods is Rs 30,000, what is his net gain? (3 marks) Section C - Diagrams (10 marks) 11. Draw a flowchart showing how money flows in the banking system: depositors -> bank -> borrowers, and the interest paid and received at each stage. (4 marks) 12. Draw a chart comparing formal and informal sources of credit with two examples each and their typical terms (interest, collateral, documentation). (3 marks) 13. Draw a flowchart showing how an SHG works, from regular savings by members to the group getting a bank loan and lending to members. (3 marks) Section D - Analysis and Higher-order Thinking (15 marks) 14. 'Credit has its own unique role in development.' Explain this statement by comparing the cases of Salim, who borrowed from a bank to meet a production order, and Swapna, whose crop failed after she borrowed from a moneylender. When does credit help and when does it push a borrower into a debt trap? (5 marks) 15. Why do poor households still depend largely on informal sources of credit? Explain with reference to collateral, documentation and the presence of banks in rural areas. Why is it necessary to expand formal sources of credit to the poor? (5 marks) 16. Explain how the Self Help Groups and the Grameen Bank of Bangladesh help solve the problem of credit for the poor. Why are SHGs especially important for women? (5 marks) Instructions: Time allowed 2 hours. Attempt all sections. Show the formula for simple interest (P x R x T / 100) and all steps in calculations. Answer with examples from Indian villages and towns.