NCERT Solutions for Class 10 Social Science Economics Chapter 3 - Money and Credit

In this chapter, students will learn about the system of money and credit. It is a system that existed many centuries ago in which humans exchange goods for the fulfillment of their requirements. The major problem in this system was the "double coincidence of wants," i.e. both the buyer and seller must have the requirement for the other's commodities for the exchange. Therefore, to solve the above-mentioned problem, money came into existence.

Money is an intermediary for the goods and services in the transaction. The use of money as a medium of exchange has removed the major difficulty of double coincidence of wants. When people have extra money with them, they deposit it into a bank. Bank accepts the deposits and credits amounts based on the interest rate on the deposit. Also, Credit creation is primarily the main function of banks. These banks give loans to people at a reasonable lending rate. Infact, the borrowing rate is always lower than the lending rate. To give out a loan, the bank requires terms of credit which include interest rate, collateral, documentation, and mode of repayment. The sources through which loans are given are broadly classified into two categories. Formal lender sources are those sources that are registered and controlled by the government. Banks fall under this category. On the other hand, Informal lender resources are those which are not registered by the government. Moneylenders, relatives, friends fall under this category.

These are those groups that are formed by a small number of persons that are economically weaker. Moneylenders charge a high rate of interest from the borrowers. Consequently, the borrowers are vulnerable to a debt trap. This is mainly due to the absence of banks in these backward areas. On the contrary, informal sources are everywhere available. Moreover, Banks don't provide loans to these people due to the absence of collateral. It is found that nearly 85 % of poor households are dependent on informal sources for loans. Thus, it is mandatory that banks and cooperatives increase their lending, particularly in the rural areas, so that the dependence on informal sources of credit reduces. In this way, they can help in eradicating rising poverty from society.