Q How do banks mediate between those who have surplus money and those who need money?

Ans Banks act as financial mediator or intermediary between the savers and borrowers. Savers are the people who have surplus money which they do not require in the near future. They deposit such money by opening an account in the bank. Banks give interest on such deposits. On the other hand, there are people who want credit for business requirements or for meeting their personal needs. Banks provide credit or loan to such people and charge interest on it. The banks charge a higher rate of interest on loans and pay a lower rate of interest on deposits. This difference between rates of interest becomes the source of income for the banks.

Q In situations with high risks, credit might create further problems for the borrower. Explain.

Ans A person takes credit or loan with the explicit or implicit understanding of returning that credit amount along with interest to the lender. Sometimes it happens that the purpose for which loan has been taken by the borrower involves high risk due to which return of the loan amount become uncertain. If the returns from the investment made out of loan amount happen to be negative then some or whole of the loan amount may be lost. If the borrower does not have any asset to compensate the lost amount then he may have to take a fresh

Q In what ways does the Reserve Bank of India supervise the functioning of banks? Why is this necessary?

OR

How does the Reserve Bank of India play a crucial role in controlling the formal sector loans? Explain.

Ans The Reserve Bank of India (RBI) supervises the functioning of the banks in the following manner:

  • 1. First of all, the RBI determines the necessary reserve ratios for banks such as Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) to be maintained by them. The reserves are maintained by the banks to deal with the liquidity crunch in case if it arises. These reserves are calculated on the basis of the deposits held with the banks.
  • 2. The banks have to submit periodically the report to the RBI regarding the credit portfolio. They have to ensure that they do not breach any of the instructions given by the RBI on the management of credit portfolio. This helps the RBI to control any risk situations that may emerge due the lending practices of the banks.
  • 3. The RBI also ensures that the banks are not being partial in providing loans. It means that the RBI ensures that the banks are lending not only to the big businessmen or companies, but also taking care of the weaker sections of the society like small farmers and agricultural labourers in rural areas and small businessmen, labourers, small artisans etc. in urban areas. Lending to such weaker sections may be included in priority sector lending of the banks.
  • 4. The RBI may super vise the expansion pattern of the banks in order to ensure that the banks are not only opening their branches in urban areas, but also expanding their facilities in rural and remote areas like hilly areas of the country.

Q Analyse the role of credit for development.

OR

‘ Credit has its own unique role for development’, justify the statement with argument.

Ans Credit facility is a boon for a country’s development. It represents the expanded purchasing power in the hands of the borrowers to meet their various requirements. It is the sacrifice of the savers which helps the borrowers to expand their production and income of the country. It helps in generating those productive resources which could not have been generated in the absence of purchasing power. We can see the practical examples of various business houses like Reliance and Tata who with the help of credit established big business houses and generated large employment. Similar examples may be seen all around us where people have taken loans to start various businesses and for building homes and gaining education etc. All these have contributed a lot in the development of the country and raising the standard of living of the borrowers.

But credit helps a borrower only when the terms of credit are reasonable. Unfortunately, these terms of credit are not very much favourable in the informal sources of credit which lead to the exploitation of borrower which may be harmful for development. Hence, it is for this reason that the formal sources of lending like banks and cooperatives must expand, so that the positive contribution of credit may lead to overall development.

Q Why do we need to expand formal sources of credit in India?

Ans We need to expand the formal sources of credit to increase the income of the weaker sections of the society and stop the exploitation of these people by the usurious practices of informal sources of credit, like moneylenders.

These informal sources of credit, like moneylenders, charge a very high rate of interest on the loans provided by them to the weaker sections of the society, like to the small farmers and agricultural labourers in rural areas, and small businessmen, labourers, small artisans etc. in urban areas who are their prime borrowers. This high interest rate leaves such people with lesser incomes. If these weaker people lose this loan amount or any part of it due to any reason, they have to compensate it either by selling their assets or collateral or take new loans to pay back old loans. This puts them in debt trap. The informal sources don’t keep proper records which may also become a source of exploitation for weaker sections.

Expansion of formal sources of credit like banks and cooperatives are required to be expanded both in rural and urban areas to stop such exploitation of weaker sections and increase their income so that their standard of living may improve.

Q What is the basic idea behind the SHGs for the poor? Explain in your own words.

OR

Write a note on Self-Help Groups (SHGs).

Ans A Self-Help Group organises the rural or urban poor, in particular women, into small group of normally 15-20 members and pool or collect their savings. The members usually belong to one neighbourhood, who meet and save regularly. These members contribute their savings which may vary from ₹ 25 to ₹ 100 or more per member per day or per month, depending on the ability of the people to contribute into the pool of the group.

This pool is utilised or its members in the form of small loans to meet their needs. The group charges interest on these loans but this is very less than what the informal sources of loans such as moneylenders or traders charge. After a year or two, if the group is regular in savings, it becomes eligible for availing loan from the bank. Loan is sanctioned in the name of the group and is meant to create self-employment opportunities for the members. The members may utilise such credit for buying equipments like sewing machines, handlooms, hammers, axe, shovel etc. for their works and for the purchase of seeds, fertilisers, pesticides, raw materials, cattle, house etc. The group is responsible for the repayment of the loan. Because of this feature, banks are willing to lend to the SHGs, even though they have no collateral.

Q Look at a 10-rupee-note. What is written on top? Can you explain this statement?

Ans The top of the 10-rupee-note contains the promise of the Governor of the Reserve Bank of India in these words – “I PROMISE TO PAY THE BEARER THE SUM OF TEN RUPEES.” This statement means that the RBI governor promises to pay the value of ten-rupee-note in the form of other denominations of Indian currency equivalent to rupees ten. This promise of the Governor of RBI represents the legal status of the Government of India to this currency.

Q What are the reasons yjsy the banks might not be willing to lend to certain borrowers?

Ans The banks might not be willing to lend to certain borrowers due to the following reasons:

  • 1. The borrower might not having proper guarantee or collateral.
  • 2. The previous track record of the bor rower regarding loan repayment is not good.
  • 3. The purpose for which the borrower wants to take loan involves very high risks or uncertainty and the bank has the doubt of getting its loan back.
  • 4. The bank is not satisfied with the purpose for which the borrower is taking the loan.
  • 5. The borrower is not able to present a proper project report showing convincing returns on investment.
  • 6. If the amount of the loan is ver y high which the bank is not willing to lend to a single borrower.
  • 7. The RBI has put restrictions on the bank to lend to certain category of borrowers.

Q Manav needs a loan to set up a small business. On what basis will Manav decide whether to borrow from the bank or the moneylender? Discuss.

Ans In order to decide whether to take loan from a bank or moneylender, Manav has to consider the following factors:

  • 1. Availability of banks in the area: Only when banks are available in the area, Manav can take loan from them. Otherwise he will have to resort to a moneylender.
  • 2. Availability of necessary documents and collateral: If Manav has got the necessary documents and collateral, only then he can take loan from a bank. Otherwise he will have to go to a moneylender. Moneylenders may sometimes lend without collateral and documents if they know the borrower personally.
  • 3. Rate of interest: If Manav does not want to pay higher rate of interest then he will have to take loan from the bank because the moneylenders charge a very high rate of interest.
  • 4. Other terms and conditions: Other terms and conditions like tenure of loan, mode of repayment etc. are some other factors which he may have to consider before taking loan because banks may not be very flexible in terms and conditions, while moneylenders may be.