Economics

Q. 6..‘RBI plays a crucial role in controlling the formal sector loans’. Explain.

Ans.

1. The formal resource work under the supervision of the Reserve Bank of India or the RBI. The RBI monitors that the banks actually maintain the cash balance.
2. The RBI sees that the banks give loans not just to profit making business and trade, but also provide loans to small cultivators, small scale industries, small borrowers, etc.
3. The rate of interest of the formal lenders is decided by the RBI. So normally, the interest rates are very low.

Q. 7.In what ways does the Reserve Bank of India supervise the functioning of banks? Why is this necessary?

Ans.

1. It ensures that the banks actually keep a certain % of their deposits as cash balance/cash reserve with the Central bank.
2. It observes that banks give loans to small activators, small scale industries, small borrowers also and not become a profit making business.
3. Report has to be submitted periodically by the banks to RBI containing details such as how much they have lent, to whom and at what rate of interest etc.
4. Central Banks is the lender of the last resort. Whenever banks are short of funds, they can take loans from the Central Banks. Thus it is source of great strength to the banking system.
5. It acts as a bank of central clearance settlements and transfers.

Q. 8.Explain the loan activities of banks.

Ans.

1. Banks keep only a small proportion of their deposits as cash with themselves. This is kept as a provision to pay the depositors who might come to withdraw money from the bank.
2. Banks use the major portion of the deposits to extend loans. Banks make use of the deposits to meet the loan requirements of the people.
3. In this way, banks mediate between the depositor and borrowers.
4. Banks charge a higher interest rate on loans than what they offer on deposits.
5. The difference between what is charged from the borrowers and what is paid to the depositors is their main source of income.

Q. 9. What is the main source of income for the bank?

Ans. The difference between what is charged from the borrowers and what is paid to the depositors is their main source of income.

Q. 10 . Distinguish between formal and informal credit sources.

Ans.
Formal Sector

1. These resources work under the supervision of the Reserve Bank of India (RBI).
2. The rate of interest is very low.
3. Commercial banks, cooperative, societies etc are the main sources of formal credit.

Informal Sector

1. These do not work under any government organization.
2. The rate of interest is very high.
3. Relatives, money lenders and landlords are the main sources of informal credit.

Q. 11.‘Most of the poor households are still dependent on informal sources of credit’. Explain.

Ans.

1. Banks are not present everywhere in rural India, where as the informal sources are easily available in all the villages.
2. Getting a loan from the bank is much more difficult than taking a loan from the informal resources because bank loans require proper documents and collateral. Most of the poor people don’t possess anything to offer as collateral.
3. Moneylenders provide loan to the poor people without any collateral.
4. The formal sources provide loan only for productive purposes, whereas the informal sources provide credit for productive and non-productive purposes.
5. The method of business of the formal source is very complex, whereas the informal resources have a very simple way of business.

Q.12. Why should credit at reasonable rates be available for all?

Ans

1. Inform credit tries to exploit the poor farmers and workers by charging a very high rate of interest on loans and imposing unreasonable terms of credit.
2. At present rich households avail the benefits of formal credit and poor have to depend on the informal sources due to some weak point like absence of collateral security etc.
3. Therefore it should be ensured that formal credit should provide credit at reasonable rates to all and especially poor ones to help them fulfill their needs.