Ans: The use of money makes exchange easier because money acts as a medium of exchange. A person holding money can easily exchange it for any commodity or service that he or she wants.

In a barter system, goods are directly exchanged without money, and this requires a double coincidence of wants — both parties must agree to sell and buy each other's commodities. For example, a shoe manufacturer who wants wheat would have to find a wheat farmer who also wants to buy shoes. This is very difficult.

When money is used, the shoe manufacturer first sells shoes for money and then uses that money to buy wheat from any farmer. He does not need to find a person who wants both to buy shoes and sell wheat. Thus, money removes the need for double coincidence of wants and makes exchange much simpler.

Ans: Some examples of barter exchange or wages paid through barter are:

• A farmer gives a portion of his crop to a labourer in return for help during harvest.
• A blacksmith repairs farm tools for a farmer and receives grain instead of money.
• A village barber cuts hair and is paid in grain or food.
• A potter gives pots to a farmer and receives vegetables or wheat in return.
• In some villages, a landlord allows a worker to stay on his land in exchange for work, without any cash payment.
• A tailor stitches clothes for a neighbour and receives milk or vegetables as payment.

These examples show that barter still exists in some situations, especially in rural and remote areas.

Ans: To withdraw Rs 20,000 in cash, M. Salim would write a cheque in his own name or to "Self" (cash). He would:

• Write the date on the cheque.
• Write "Self" or his own name in the "Pay to" line.
• Write the amount in words as "Twenty Thousand Rupees Only".
• Write the amount in figures as Rs 20,000 in the box meant for it.
• Sign the cheque at the bottom right corner.
• Mention "Cash" on the back of the cheque, if required by the bank.

He would then present the cheque at the bank counter and receive Rs 20,000 in cash.

Ans: The correct answer is (ii) Salim’s balance in his bank account decreases and Prem’s balance increases.

When Salim makes a payment to Prem by cheque, the amount is transferred from Salim's bank account to Prem's bank account. Therefore, Salim's balance decreases and Prem's balance increases.

Ans: Demand deposits are considered as money because:

• They can be withdrawn on demand at any time by the account holder.
• They can be used to make payments by cheque without using cash.
• They are widely accepted as a means of payment along with currency.
• They share the essential features of money, that is, they act as a medium of exchange.

Thus, along with currency, demand deposits constitute money in the modern economy.

Ans:

	Salim	Swapna
Why did they need credit?	To complete production on time for a large order of 3,000 pairs of shoes. He needed money to hire extra workers and buy raw materials.	To meet the expenses of cultivation of groundnut on her three acres of land.
What was the risk?	Risk was low because he had a confirmed order and expected good profit. If he failed to deliver on time, he might lose the order.	High risk because the crop could fail due to pests, bad weather or other reasons. If the crop failed, she would not be able to repay the loan.
What was the outcome?	He delivered the order on time, made a good profit and repaid the loan. Credit helped him increase his earnings.	The crop was hit by pests and failed. She could not repay the moneylender and fell into a debt trap. She had to sell part of her land to repay the loan.

Ans: If Salim continues to get orders from traders, his position after 6 years would be much better. He would:

• Earn regular profits from completing orders on time.
• Be able to repay his loans and build a good reputation with lenders.
• Expand his business by hiring more workers and buying better equipment.
• Be able to get credit more easily and at lower interest rates.
• Increase his income and improve his standard of living.

Thus, credit would play a positive role in his development.

Ans: Swapna's situation is risky because of the following factors:

• Pesticides: Even though Swapna sprayed her crops with expensive pesticides, it made little difference. The pesticides were costly and did not save the crop, adding to her expenses without any benefit.
• Role of moneylenders: She borrowed from the moneylender at a very high interest rate. When the crop failed, she could not repay the loan, and the debt grew over the year into a large amount. The moneylender did not give her any relief.
• Climate: Farming depends heavily on rainfall and weather conditions. If the climate is unfavourable, the crop can fail, and the farmer cannot repay the loan.
• Lack of support: There was no insurance or government support to help her in case of crop failure.
• Small landholding: She had only three acres of land, so her income was limited and she had no savings to fall back on.

All these factors together made her situation very risky and led to a debt trap.

Ans: Lenders ask for collateral while lending because:

• It acts as a security or guarantee for the loan.
• If the borrower fails to repay the loan, the lender has the right to sell the collateral to recover the money.
• It reduces the risk for the lender.
• It ensures that the borrower will try to repay the loan to avoid losing the asset.

Common examples of collateral are land, building, vehicle, livestock and deposits with banks.

Ans: Yes, poverty affects the capacity of people to borrow in the following ways:

• Poor people often do not have collateral like land, building or bank deposits to offer as security.
• Without collateral, banks are unwilling to give them loans.
• They are forced to borrow from informal sources like moneylenders, who charge very high interest rates.
• High interest rates make repayment difficult and can lead to a debt trap.
• They may also lack proper documents and records needed for bank loans.

Thus, poverty reduces their access to cheap and formal credit.

Ans: While taking a loan, borrowers look for easy terms of credit. This means low interest rate, easy conditions for repayment, less collateral and documentation requirements.

Ans: The various sources of credit in Sonpur are:

• Village moneylenders
• Agricultural traders
• Landowner-employers
• Commercial banks
• Cooperative societies (like Krishak Cooperative)

Ans: The various uses of credit in Sonpur are:

• For cultivation (buying seeds, fertilisers, pesticides, etc.)
• For meeting daily expenses when there is no work
• For sudden illnesses or functions in the family
• For purchasing agricultural implements
• For agricultural trade
• For fishery
• For construction of houses
• For storing crops in cold storage

Ans:

Borrower	Source of Credit	Interest Rate	Terms of Credit
Small farmer (Shyamal)	Agricultural trader / moneylender	3% per month (36% per annum) from trader; earlier 5% per month (60% per annum) from moneylender	Must sell crop to the trader; inputs supplied on credit; repayment after harvest
Medium farmer (Arun)	Bank	8.5% per annum	Can be repaid anytime in the next three years; requires collateral and documents; can get fresh loan against cold storage receipt
Landless agricultural worker (Rama)	Landowner-employer	5% per month (60% per annum)	No collateral; repays by working for the landowner; often takes fresh loan before repaying old one; no formal agreement

The medium farmer gets the cheapest credit from the bank, while the small farmer and landless worker pay much higher interest rates to informal lenders.

Ans: Arun will have a higher income from cultivation compared to Shyamal because:

• Arun has seven acres of land, while Shyamal has only 1.5 acres.
• Arun gets a bank loan at 8.5% per annum, which is much cheaper than the 36% per annum that Shyamal pays to the trader.
• Arun can store his potatoes in a cold storage and sell them later when prices are higher, earning more profit.
• Arun can get a fresh loan against the cold storage receipt, which helps him meet further expenses.
• Shyamal is forced to sell his crop to the trader at low prices immediately after harvest, reducing his income.

Thus, Arun's better access to cheap credit and storage facilities gives him higher income.

Ans: No, not everyone in Sonpur can get credit at a cheap rate.

The people who can get cheap credit are:

• Medium and large farmers like Arun, who have land and can provide collateral to banks.
• Members of cooperative societies like Krishak Cooperative, who can get loans at reasonable rates.

The people who cannot get cheap credit are:

• Small farmers like Shyamal, who depend on traders and moneylenders at high interest rates.
• Landless agricultural workers like Rama, who depend on landowner-employers at very high interest rates.

This is because banks require collateral and documents, which the poor do not have.

Ans:

(i) The correct answer is will rise.

Rama pays 5% interest per month and often takes a fresh loan before repaying the previous one. So her debt will keep increasing over the years.

(ii) The correct answer is banks demand collateral which everyone cannot provide.

Arun has seven acres of land and can provide collateral, so he gets a bank loan. Most other people in the village do not have enough collateral or documents to get a bank loan.

Ans: This is an activity-based question. Students should talk to people in their area and record their findings. Points to note:

• Who provides credit — banks, cooperatives, moneylenders, traders, relatives, friends, employers.
• Interest rate charged by each source.
• Whether collateral is required.
• Documentation requirements.
• Mode of repayment — cash, kind, or work.
• Whether the borrower faces any difficulty in repaying.

Students will find that formal sources charge lower interest but require collateral, while informal sources charge high interest but are easier to access.

Ans:

Formal Sources of Credit	Informal Sources of Credit
Include banks and cooperative societies.	Include moneylenders, traders, employers, relatives and friends.
Supervised by the Reserve Bank of India (RBI).	No organisation supervises their credit activities.
Charge lower interest rates.	Charge much higher interest rates.
Require collateral and proper documents.	Often do not require collateral; may work on personal knowledge.
Follow government rules and regulations.	May use unfair means to recover money.
Loans are safe and terms are transparent.	Loans can lead to debt traps and exploitation.

Ans: Credit at reasonable rates should be available for all because:

• It helps people increase their income and improve their standard of living.
• It enables farmers to buy seeds, fertilisers and equipment for cultivation.
• It helps people start small businesses and industries.
• It prevents the poor from falling into a debt trap due to high interest rates.
• It reduces dependence on informal lenders who exploit borrowers.
• It promotes overall economic development of the country.

Thus, cheap and affordable credit is crucial for the country's development.

Ans: Yes, there should be a supervisor to look into the loan activities of informal lenders, because at present they can charge very high interest rates and use unfair means to recover money. Supervision would protect borrowers from exploitation.

However, the task would be quite difficult because:

• Informal lenders are not registered and are scattered across villages and towns.
• They keep no records of their transactions.
• There are no formal agreements or documents to check.
• It is difficult to identify all the informal lenders and monitor them.
• Borrowers themselves may not complain because they depend on these lenders for urgent needs.

Therefore, supervising informal lenders is much harder than supervising banks and cooperatives.

Ans: The share of formal sector credit is higher for richer households because:

• Richer households have collateral like land, buildings and bank deposits to offer as security.
• They have proper documents and records needed for bank loans.
• They have a regular income and can repay loans on time.
• Banks consider them less risky borrowers.
• Poor households lack collateral and documents, so banks are unwilling to lend to them.

Thus, the poor have to depend on informal sources at high interest rates.

EXERCISES

Question 1

Question 2

Question 3

Question 4

Question 5

Question 6

Question 7

Question 8

Question 9

Question 10

Question 11

Question 12

Question 13

Question 14

ADDITIONAL PROJECT / ACTIVITY

Question 1