Loans from banks and financial institutions - class-XI

Barter system was a system of exchange where goods were exchanged for goods and there was no common medium of exchange in the economy. Barter system had many drawbacks like lack of double coincidence of wants, lack of a common unit of value, difficulty of future payments or contractual payments and difficulty of storage of value and transfer of value. Therefore, unemployment is not a problem related to barter system. 

Lack of double coincidence exists in barter exchange. It  refers to the situation where the mutual wants of the buyer and seller are less likely to be fulfilled simultaneously.  If the buyer's wants can be fulfilled by exchange but cannot provide what the seller wants, the exchange is unlikely to happen.

• Formal sources of credit are:
• Banks and Co-operative societies.
  
• Reserve bank of India will supervise the activities of the banks and co-operative societies in India.
  
• Employers do not fall under formal sources of credit lenders in our country.

• The interest charged by the bank from its borrowers is higher than the interest it pays to its depositors.

• The difference between the interest paid by the bank to its depositors and interest paid by the borrowers to the bank is the income of the bank.

We know $A = P + P.i.t$
i.e. $1050 = 1000 + 1000 \times i\times 6/12$
$50 = 500i$
$i = 1/10 = 10$%.

Informal sector loans are those provided by non-institutional sources such as moneylenders, friends, or relatives. Banks and NABARD are formal financial institutions.

Chit funds in India are governed by the Chit Funds Act, 1982. Under this Act, the chit fund business can be register and regulated only by the individual State Governments. Regulator of chit funds is the Registrar of Chits selected by the individual state government under Section 61 of Chit Funds Act. 

Powers of negotiation vest in the Registrar and the state government disturbed is the Appellate authority. In case of failure of a chit fund business, the task for windy up such a business also vests with the individual State Governments. 

Moreover, the Prize chits and money exchange schemes are illegal and are disqualified under the Prize Chits and Money movement Schemes (Banning) Act, 1978. Powers of investigation under this Act are vested with the disturbed state police authorities.

Thus, the correct option is C.

The US dollar is presently being used as the numeraire for all international transactions and calculating the foreign reserves of the economies (it means that an economy may be maintaining its foreign currency. Reserves in many world currencies as per its use show its total volume in the US dollars). Similarly, all transactions of the IMF are also shown in it (including its SDRs).

The policy was implemented in India in 20072007 with the objective of providing financial security to the senior citizens who own a house. This functions just opposite to the case of 'mortgage' while borrowing money from bank to buy a housei.e., the beneficiary borrows a lump-sum loan by mortgaging his/her house and the loan is repaid in equal monthly installments (EMIs). In case the beneficiary dies before clearing the dues. his/her kins may repay the rest amount of the loan and own the house. 

Co-operation, self help and mutual help are the working principle of Co-operative bank.

1. Formal sources of credit do not include employers as there is no role of these employers all these works are related to banks and the cooperatives.
2. Employers are there merely to serve the bank staff and do the work as it is asked to do by their owner.

In 1991, India still had a fixed exchange system, where the rupee was pegged to the value of a basket of currencies of major trading partners. India started having balance of payments problems since 1985, and by the end of 1990, it found itself in serious economic trouble. The government was close to default and its foreign exchange reserves had dried up to the point that India could barely finance three weeks’ worth of imports. As in 1966, India faced high inflation and large government budget deficits.This led the government to devalue the rupee. At the end of 1991, the Indian Rupee was devalued considerably.

'Signature' of the borrower is the primary security for any loan (such loans are known as 'unsecured loans; or even 'signature loans' ). All loans might not be supported by the secondary securities (fixed assets).

1. Money is the medium of exchange in the modern times.
2. It can be used as a unit of account and store of value as well.
3.money acts as an intermediate in the exchange process, it is called a medium of exchange.

Economic growth is prerequisite for the economic development of the country.
Cheap and affordable credit (low-interest rates) is one of the prerequisites for economic growth of any country. 

• Collateral is an asset taken by the banks / money lenders for lending money to its customers.
  
• Collateral is a type of a security taken by the banks from its customers.
  
• Collateral can be in the form of fixed deposit, property documents, etc.

• In rural areas farmers take credit for crop production.
• Farmers usually lend from from co-operative societies or banks or from money lenders if banks are not available.
• Usually, co-operative banks charge lower interest rates as compared to money lenders.
  

• In Modern times paper notes and coins are used as medium of exchange.
• Paper notes and coins are printed and circulated by RBI in India except One Rupee notes and coins.
• One Rupee coins are printed by the Finance Ministry.
• Only paper notes and coins printed by Government are authorised to use.
  

• 
  1:Credit refers to a loan, an agreement in which the lender supplies the borrower with money, goods or services which is to be returned in future
  2:Terms of credit include interest rate, collateral (security) and documentation related to the lending of money.

The loan extended by banks and co-operative institutions constitutes formal sector of credit. The functioning of these financial institutions is supervised by the Reserve Bank of India.

• About 60% of the Indian population is dependent on agriculture.
• Most of the Indian farmers are small and marginal farmers.
• Rural farmers savings are very less.
• Rural farmers seek credit for the production of crops as there are no savings left with them from the last year.
  

1:Collateral is a type of a security/guarantee taken by the banks from its customers.
2:Usually collateral are taken by the banks for lending money to its customers.
3:Collateral can be in the form of fixed deposit documents, property, documents, etc.

Money helps to facilitate trade because people in the economy generally recognize it as valuable. Money is called medium of exchange because money is a widely accepted token that can be used for exchange of any good or service. In old days, barter system was used as medium of exchange and later it was gold.

When a poor person takes a loan he does find it convenient to go to a bank basically because he is uneducated and even does not have a collateral to present in a bank.
Hence he reaches out to the informal sources of credit which are basically the moneylenders. When he goes to moneylenders the rates of interest charged by them is very high but since the borrower is in need he has no other option.

• Credit means agreement between borrower and lender by which borrower lends money, goods and services in return for the promise of future payment.
• If credit not repaid by the borrower then they are termed as defaulters.
• Credit history of the borrowers will be affected.
• In India, RBI supervises the credit of banking system.
  

Credit means agreement between borrower
and lender by which borrower lends money, goods and services in return
for the promise of future payment.
Economic growth is crucial for the economic development of the country.
Cheap and affordable credit (cheap interest rates) is crucial for economic growth of any country.

• Money lenders are the indigenous bankers of India.
• Usually, they lend money on short term basis. 
  
• Collateral in form of gold is taken from borrowers.
• Money lenders are not supervised or controlled by RBI in India.

Small farmers borrow money for cultivation from money lenders.
They borrow money from money lenders because they don't have any form of security (collateral) as requested by the formal sources of credit. 
Small farmers often get exploited with higher interest from money lenders.

In a SHG (Self Help Group) important decisions in regard to loan and savings are taken by group members. Self Help Groups issue loans at reasonable rate of interest

1:Self Help Group members usually belong to one neighbourhood.
2:Self Help Group is a small group of 15 to 20 people formed to mutually help each other.
3:Banks supports SHGs by means of bank linkage programme.

Self Help Group is a small group of organization of 15 to 20 people formed to mutually help each other.
Self Help Groups help in promoting Self Employment , credit, awareness and savings.
Banks support SHGs by means of Bank Linkage programme.

Collateral is a type of a security taken by the banks from its customers.Collateral can be in the form of fixed deposit,  property documents, etc.Rural farmers/ Marginal farmers/ Landless labourers occupy the majority of rural poor population and savings of rural poor is negligible. 
Providing collateral to bank for borrowing loans is a big challenge for rural poor.
Thus banks usually reject loans to rural poor due to the non presence of collateral security by poor.

Saving per member of a SHG varies from Rs 25 to Rs 100 or more, depending upon the ability of the people to save.
Savings led to capital formation and later led to investment in ventures.
SHGs led to economic empowerment of women in India.

Self Help Groups is a small group of 15 to 20 people formed to mutually help each other.
Self Help Groups help in promoting self employment, credit, awareness and savings.
Banks in India supports SHGs by means of bank linkage programme.
SHGs led to economic empowerment of women in India.

CRISIL - Credit Rating Information Services of India Limited
CARE -  Credit Analysis and Research
ICRA - Investment information and credit rating agency

The currency convertibility concept was finalized between 1968-1973 in Bretton Woods Agreement. 
The currency convertibility was made available for current account transactions and trade.

The Reserve Bank of India supervises the functioning of formal sources of loans.
RBI is also the Central Bank of India.
RBI doesn't supervise the informal sources of credit institutions.

Collateral is an asset that a borrower offers to a lender as a security or guarantee for a loan, which the lender can seize if the borrower defaults. The other options refer to related concepts or general terms rather than the specific pledged asset.

Majority of the people in rural areas depend on informal sources for loans.

Informal sources include landlords and rich farmers.

 The main reasons behind this are:

1. The number of banks in rural remote areas is low.

2. Bank loans require proper documents and collateral (security). Absence of collateral is one of the major reasons which prevents the poor from getting bank loans.

3. Informal lenders like landlords, know the borrower personally and hence, are often willing to give a loan without a security.

• Money borrowed on higher rates of interest will usually increase the debt burden.
• Informal sources of credit charges higher rates of interest. 
  
• Due to higher rate of interest the informal sources of credit are exploitative in nature.
  

The central co-operative banks are the federations of primary credit societies in a district.
The central co-operative banks are
of two types.
The state co-operative bank acts as a watchdog of co-operative banks operating in the state.

The interest charged by the bank from its borrowers is higher than the interest it pays to its depositors.
The difference between the interest paid by the bank to its depositors and interest paid by the borrowers to the bank is the income of the bank.

• In 1861-62, the British rulers introduced its first paper money: ₹10 notes in 1864, ₹5 notes in 1872, ₹10,000 notes in 1899, ₹100 notes in 1900, 50-rupee notes in 1905, 500-rupee notes in 1907 and 1000-rupee notes in 1909.

The following securities might be considered as collateral:

1. Original sale deed of the property.
2. Documents to indicate the borrower's banks deposits.
3. Other assets owned by the borrower.
   

People deposit their money in the banks as it earns interest and money deposited in the banks are secured.
Money can be withdrawn any time by the customer on demand.

Formal sector credit in India includes loans from banks and cooperatives. RBI supervises their functions of giving loans. Rich urban households depend largely on formal sources of credit. Lower rate of interest on loans is charged as compared to informal sources of credit.

A self-help group is an economic intermediary group of 10 to 20 local women or men between 18 to 40 years. Most self-help groups are situated in India, though SHGs can be established in other countries, particularly in South Asia and Southeast Asia. 

SHG is not whatever thing but a group of people who are on daily wages, they form a group and from that group, one person collects the money and gives the wealth to the person who is in need. Members also make modest measure savings contributions over a few months until there is adequate money in the group to begin lending. 

Thus, the correct option is C.

Credit exposure is the total amount of credit made available to a borrower by a lender. Advances against the banks fixed deposit granted to the company is not included in this because it is amount which the lenders grant to the borrower. 

A Self Help Group (SHG) is a financial intermediary committee usually composed of 10–20 local women or men who provide financial assistance to its members by providing them finance in the a minimal interest rate. Kerala was on the  top in the list of the states in India who availed credit through Self Help Groups (SHGs). 

In order to help senior citizens who own a home but do not want to sell them, and yet, supplement their regular cash flow, the government of India has introduced the ‘Reverse Mortgage Scheme, 2008’. 

The major problems of rural indebtedness is that the Indian farmers borrows loan every year from the informal sources which charge very high rate of interest. Even the amount of the loan is very huge which the farmers are not able to repay from their annual earnings which creates a debt trap out of their life. 

PMLA: Prevention of Money Laundering Act (2002)(2002).

Microcredit is generally considered to have originated with the Grameen Bank founded in Bangladesh in 1983.

Muhammad Yunus is a Bangladeshi social entrepreneur, banker, economist, and civil society leader who was awarded the Nobel Peace Prize for founding the Grameen Bank and pioneering the concepts of microcredit and microfinance.

Creditworthiness is how a lender determines that you will default on your debt obligations, or how worthy you are to receive new credit. Your creditworthiness is what creditors look at before they approve any new credit to you.

If the credit facility applied for in a bank is rejected due to any reason, then it is the responsibility of the respective bank to state the reasons briefly on the loan application received by the bank from the account holder and on the disposal register thereafter. 

Subprime mortgage lending refers to providing loans to borrowers who have poor credit histories or do not meet the standard creditworthiness requirements, often at higher interest rates.

A Self Help Group (SHG) is a financial intermediary committee usually composed of 10–20 local women or men who provide financial assistance to its members by providing them finance in the a minimal interest rate. It is a part of micro financing as the amount of the loan is very minimum due to small group of people. 

A term loan is a monetary loan that is repaid in regular payments over a set period of time. Term loans usually last between one and ten years, but may last as long as 30 years in some cases. A term loan usually involves an unfixed interest rate that will add additional balance to be repaid.

For term loans payable in installments, the limitation period is 3 years for each installments, starting on the due date of each such installments.

Informal credit sources are those outside the regulated banking system. Moneylenders operate outside the formal regulatory framework of the central bank.

CIBIL (Credit Information Bureau (India) Limited) was the first credit information company established in India to maintain credit records of individuals.

Home loans are retail banking products targeted at individuals who intend to purchase residential property for personal use.

CRISIL (Credit Rating Information Services of India Limited) is a prominent credit rating agency of Indian origin.

Subprime lending means giving loans to people who may have difficulty maintaining the repayment schedule, sometimes reflecting setbacks, such as unemployment, medical emergencies, etc.

Moneylenders are informal finance providers who are not registered under the government, as such, they fall under non-institutional credit agency. 

Credit creation is the process by which commercial banks expand the money supply by lending out a portion of their deposits, keeping only a fraction as reserves.

Education loans are specifically designed to provide financial assistance to students for their tuition and related academic expenses.

The RBI has historically focused on strengthening Urban Cooperative Banks (UCBs) through various schemes, including liquidity support mechanisms like the Emergency Fund Facility.

Money laundering involves three stages: placement (introducing illicit cash into the financial system), layering (moving funds to disguise the source), and integration (returning the funds to the economy as legitimate).

Scheduled banks are those listed in the Second Schedule of the RBI Act. Moneylenders are informal and are not part of the scheduled banking structure.

A Letter of Credit is a document issued by a bank that guarantees a buyer's payment to a seller will be received on time and for the correct amount.

Non-performing assets (NPAs) are loans or advances that are in default or in arrears, meaning the principal or interest is past due.

The Reserve Bank of India (RBI) mandates the Base Rate system to ensure transparency in lending rates and to prevent banks from lending below a certain threshold.

True. 

Money serves as the standard of deferred payment. Deferred payments refer to payments made on loans, salaries, pensions, insurance premium, interests, and rents. The necessary condition for deferred or credit payment is that the amount of repaid money should be the same as it was at the time of purchase of the good. Since all the goods and services can be expressed in terms of money, it makes the future payments easy and functional which makes money the basis for generating credit in the economy. But sometimes credit money can be refused owing to the natural appreciation or depreciation of commodities with time due to which their monetary value at the time of deal does not match with their monetary value at the time of payment. 

Savings refers to the part of the income which is not spent on the consumption of goods and services in the economy. It is that portion of the income which is kept aside for an instant and then re-invested into some asset in order to generate more income through these savings. 

Money market refers to the market where money is traded just as a commodity between two parties. It is a part of financial market where money is used as a financial assets for short term borrowing, lending, buying and selling which matures in less than a year. Since money is given and taken on credits in this market, therefore it is also known as credit market. 

Money market refers to the market where money is traded just as a commodity between two parties. It is a part of financial market where money is used as a financial assets for short term borrowing, lending, buying and selling which matures in less than a year. Since money is given and taken on credits in this market, therefore it is also known as credit market. 

Time deposits refers to the deposits with the commercial banks which can be withdrawn from the account holder's account after the expiry of a specified period of time. Savings do not form a part of time deposit as it is a part of demand deposit because any amount up to the limit of the credit balance can be withdrawn as per the wish of the account holder. Therefore, savings deposit does not form a part of time deposit. 

The present value is the current worth of a future sum of money or stream of cash flows given a specified rate of return.

The person who provides loan is known as a money lender. In other words, the person who lends money to someone or any institution for the purpose of personal expenditure like consumption of goods and services or investment is known as a money lender. 

An annuity where payments are made at the end of each period is called an ordinary annuity or an immediate annuity.

Interest refers to payment against the loan which we borrow from other people. It is the regular charge which a borrower pay to the lender for holding a sum of money of the lender. So, interest is the excess money which is paid by the borrower for holding a specified sum of money. Therefore, interest is the extra money paid on borrowed money. 

Positive economics deals with objective analysis and facts, describing how the economy works based on observed cause-and-effect relationships, rather than making value judgments.

True.

Quantitative measures of monetary policy includes those instruments which focus on the overall supply of the money. It influences the total volume of credit in the economy. It includes: 

A. Two Policy Rates: 

Bank rate is the rate charged on the loans offered by the Central bank to the commercial banks without any collateral. It is increased at the time of inflation to reduce the money supply in the economy and vice versa. 

Repo rate is the rate charged on the secured loans offered by the Central bank to the commercial banks that includes collateral. It is increased at the time of inflation to reduce the  money supply in the economy and vice versa. 

B. Two Policy Ratio:

Statutory Liquidity Ratio (SLR) refers to liquid assets that the commercial banks must hold on daily basis as a percentage of their total deposits. SLR is determined by the central bank and is a legal requirement to be fulfilled by the commercial banks.  It is increased at the time of inflation to reduce the money supply in the economy and vice versa. 

Cash Reserves Ratio (CRR) refers to the proportion  of total deposits of the commercial banks which they must  keep as cash reserves with the central bank. The ratio is fixed by the central bank and is varied from time to time to control the supply of money in the economy depending upon the prevailing situation of inflation or deflation.

C. Open Market Operations: 

Open market operation (OMO) is a monetary policy by the central bank in which the bank deals in the sale and purchase of securities in the open market to control the supply of money in the economy. By selling the securities, the central bank soaks liquidity from the economy and by buying the securities, the central bank releases liquidity. 

Margin requirement refers to the difference between the current value of the security offered for loan (called collateral) and the value of loan granted. By raising the margin requirement, the borrowing capacity of the borrower reduces as with the same amount of loan borrowed, the value of the loan decreases due to high margin requirement. 

Open market operation (OMO) is a monetary policy by the central bank in which the bank through government deals in the sale and purchase of securities and bonds in the open market to control the supply of money in the economy. By selling the securities and bonds, the government soaks liquidity from the economy which controls the inflation in the economy by decreasing the purchasing power of the people and by buying the securities and bonds, the government releases liquidity which controls deflation in the economy by increasing the purchasing power of the people.

Credit creation is the process by which banks expand the money supply through lending, as deposits are used to create new loans.

In a barter system, you need a double coincidence of wants. Money acts as a medium of exchange, allowing people to trade without needing the other person to want exactly what they have.

As a medium of exchange, money is universally accepted as a means of payment for goods and services, facilitating trade.

Effective credit management requires market demand, the borrower's ability to repay, and the mitigation of bad debts to ensure the sustainability of the lending process.

Banks act as financial intermediaries that mobilize savings from the public to lend to various sectors. They provide credit for both industrial and commercial activities to facilitate economic growth.

At the time of independence in 1947, India possessed a banking system that was already established, though it was largely concentrated in urban areas and served specific interests. It was not non-existent, but it was not fully developed or inclusive of the rural population.

Quantitative methods of credit control regulate the total volume of credit in the economy. The Bank Rate is a classic quantitative tool, whereas Moral Suasion is a qualitative or selective method.

An asset owned by borrowers and pledged as a guarantee to obtain loan is known as collateral.
Collateral is a form of security taken from the borrowers of loan by the banks or co-operative societies to lend loans.
Collateral is a part of terms of credit of the formal sources of credit.

In Self Help Groups, group members decide the savings and loan activity options.
SHG is a mutual help group.
They come together to solve their economic issues and earn income.

Self Help Groups issue loans at reasonable rate of interest.
In a SHG, important decisions in regard to loan and savings are taken by group members.
SHG is a mutual help group who provide support among themselves.
They come together to solve their economic issues and earn income.

• Self Help Group is a small group of 10 to 20 people formed to mutually help each other.
• SHGs help in promoting self employment, credit, awareness and savings.
• Banks supports SHGs by means of bank linkage programme.
  

Easy term of credit includes steep condition of repayment.
Tougher terms of credit include higher rates of interest, collateral security and more number of documents related to loan.

Teaser Rate: A teaser rate is a low adjustable introductory interest rate which is charged to customers during the initial stages of a loan. The rate, which can be as low as zero per cent, but is not permanent. The rate advertised for a loan, credit card or deposit account in order to attract potential customers to obtain the service. Typically the teaser rate is 0%. The teaser rate is only temporary. After its expiration, the rate increases to a normal or much higher than normal rate, and in some cases, the borrower cannot keep up with making payments.