Telangana SCERT Class 9 Social Studies Chapter 9 Solution – Credit in the Financial System. Here on this post we have provided Class 9 Social Studies Credit in the Financial System Telangana State Board Solution. Telangana State Board English Class IX Medium Students can download this Solution to Solve out Improve Your Learning Questions and Answers.
Telangana State Board Class 9 Social Studies Chapter 9 Credit in the Financial System Solution:
1.) Most of the credit needs of the poorhouseholds are met through informal sources. The dependence of richer households on informal credit is less. Do you agree? Use the data given on page 114 to support your answer.
Ans: The rich households are availing cheap credit from formal lenders whereas the poor households have to pay a heavy price for borrowing from informal sources.
Description of the Borrower Households |
Formal Credit (in %) | Informal Credit (in %) |
Total Credit (in %) |
Poor Households | 15 | 85 | 100 |
Households with few assets | 47 | 53 | 100 |
Well-off Households | 72 | 28 | 100 |
Rich Households | 90 | 10 | 100 |
The table above shows the share of formal and informal sources for people living in urban areas. The people include both rich and poor households. You can see that 85 per cent of the credit needs of the poor households are met from informal sources. Formal sources of credit account for only 15 per cent. Comparing this with the rich households, we find only 10 percent of their loans are from informal sources, while 90 per cent is from formal sources.
First, the formal sector still meets only about half of the total credit needs of the rural people. The remaining credit needs are met through theinformal sources. Most of the loans from the informal lenders have very high interest rates and do little to increase the income of the borrowers. Thus, it is necessary that banks and cooperatives increase their lending, particularly in the rural area, so that the dependence on informal sources of credit reduces. Second, while formal sector loans need to expand, it is also necessary that everyone receives these loans. At present, it is the richer households who receive formal credit whereas the poor have to depend on the informal sources. It is important that the formal credit is distributed more equally so that the poor can benefit from the cheaper loans.
2.) How are the high interest rates on loans harmful?
Ans: Although many states have laws to protect its people from informal credit providers such as money lenders from charging a high interest rate, these laws are not sufficient to make the money lenders charge low interest rates but are yet to be enforced effectively. Higher cost of borrowing means a larger part of the earnings of the borrowers is used to repay the loan. Hence, borrowers have less income left for themselves. In certain cases, the high interest rate of borrowing can mean that the amount to be repaid is greater than the income of the borrower. This could lead to increasing debt. Infact people who might wish to start an enterprise by borrowing may not do so because of the high cost of borrowing. For these reasons, banks and cooperative societies need to lend more. This would lead to higher incomes because many people could then borrow cheaply for a variety of different needs.
3.) What is the basic idea behind the SHGs for the poor? Explain.
Ans: Poor households are still dependent on informal sources of credit. Getting a loan from a bank is much more difficult than taking a loan from informal sources. Bank loans require proper documents and collateral. Absence of collateral is one of the major reasons which prevents the poor from getting bank loans. They have a few assets to keep as collateral. Informal lenders such as the moneylenders, on the other hand, know the borrowers personally and hence are often willing to give a loan without collateral. The borrowers can, if necessary, approach the moneylenders even without repaying their earlier loans. However, the moneylenders charge very high rates of interest and do not reveal the terms of the transactions and harass the poor borrowers. They also have ways of linking this credit to buying the produce at a cheap rate or forcing them to provide labour. In recent years, government and Non Government Organisations (NGOs) have tried out some new ways of providing loans to the poor. The idea is to organise rural poor, in particular women, into small Self Help Groups (SHGs) and pool (collect) their savings. A typical SHG has 15-20 members, usually belonging to one neighbourhood, who meet and save regularly. Saving per member varies from Rs. 25 to Rs. 100 or more, depending on the ability of the people to save. Members can take small loans from the group itself to meet their needs. The group charges interest on these loans but this is still less than what the moneylender charges. After a year or two, if the group is regular in savings, the group is eligible for loan from the bank. This bank linkage enhances the loan amount available to all the members. Loan is sanctioned in the name of the group and it ensures that the loansare paid back. The trust and pressure among the members makes this possible. Important decisions regarding the savings and loan activities are taken by the group members. The group decides the terms of credit. Also, the group members are jointly responsible for the repayment of the loan. Any case of non-repayment of loans by any one member, it is followed up seriously by other members in the group. Because of this feature, banks are willing to lend to the poor women when organised in SHGs, even though they have no collateral as such.
4.) Talk to a banker and find out the different purposes for which people in urban areasgenerally take loans?
Ans: a. To finance the purchase of a home.
b.) To buy vehicles not at an lump-sum amount.
c.) To cover fees and other requirements for children’s higher education across the city or abroad.
d.) To cover a wedding, or a trip or vacation abroad.
e.) To cover the medical bill in an emergency if the bill exceeded the insurance amount.
5.) What is the difference between bank loans taken directly and through SHG?
Ans: Bank loans require proper documents and collateral. Absence of collateral is one of the major reasons which prevents the poor from getting bank loans. They have a few assets to keep as collateral. Informal lenders such as the moneylenders, on the other hand, know the borrowers personally and hence are often willing to give a loan without collateral. The borrowers can, if necessary, approach the moneylenders even without repaying their earlier loans. However, the moneylenders charge very high rates of interest and do not reveal the terms of the transactions and harass the poor borrowers. They also have ways of linking this credit to buying the produce at a cheap rate or forcing them to provide labour.
In recent years, government and Non Government Organisations (NGOs) have tried out some new ways of providing loans to the poor. The idea is to organise rural poor, in particular women, into small Self Help Groups (SHGs) and pool (collect) their savings. A typical SHG has 15-20 members, usually belonging to one neighbourhood, who meet and save regularly. Saving per member varies from Rs. 25 to Rs. 100 or more, depending on the ability of the people to save. Members can take small loans from the group itself to meet their needs. The group charges interest on these loans but this is still less than what the moneylender charges.
6.) Read paragraph 3 under the heading ‘Self Helf Group for the Poor’ and answer thequestion: How are SHGs working in your area?
Ans: In recent times, there have been attempts by government and Non-Governmental Organizations (NGOs) to explore innovative approaches for providing loans to impoverished individuals. The objective is to establish small Self-Help Groups (SHGs) primarily consisting of rural poor, especially women. These SHGs aim to mobilize the collective savings of their members. Typically, an SHG comprises 15-20 members who reside in the same locality and regularly gather to save money. The amount saved per member may vary, ranging from Rs. 25 to Rs. 100 or even more, based on the individual’s capacity to save. As part of this initiative, group members can borrow small amounts from the SHG to fulfill their financial requirements. Although the group levies interest on these loans, it is still lower compared to the rates charged by moneylenders.
There are no SHGs in our area.
7.) What are the services rendered by the banks in fulfilling the needs of farmers?
Ans: The RBI has been taking steps for improving the financial access to people in rural areas. Banks operate in rural areas either through branches or through Business Correspondents (BCs). A Business Correspondent is an approved bank agent providing basic banking services using a Micro ATM (terminal). These Business Correspondents encourage people in rural and remote areas to open bank accounts, save money and also use loan facilities provided by the banks. Bio-metric smart card identification systems are used to open these accounts.
Aadhaar Enabled Payment System (AEPS):
i.) AEPS is a new payment service offered by the National Payments Corporation of India (NPCI) to banks, financial institutions using ‘Aadhaar’ number and online UIDAI authentication through their respective Business Correspondent service centres.
ii.) The customer needs his/her bank account linked to their Aadhaar number with the bank offering the AEPS service.
iii.) A customer can at present avail the following four services using AEPS through the micro-ATMs at BCs:
a.) Cash Withdrawal
b.) Cash Deposit
c.) Balance Enquiry
d.) Fund Transfer