In situations with high risks, credit might create further problems for the borrower. Explain.

The situations with high risks, credit might create further problems for the borrower:

(i)The borrower had to pay interest on principal as well as on interest to lenders.

(ii)The lenders can go against the defaulT borrower in the court to recover his principal amount and interest thereupon. 

(iii) Sometimes, the lender can sell the security or the assets as collateral pledged with the banks or co-operative society or any informal agency of credit.

We need to expand formal sources of credit in India for the reasons mentioned below:

(i) To reduce dependence on informal sources of credit because the latter charge high interest rates and do not benefit the borrower much.

(ii) Cheap and affordable credit is essential for country’s development.

(iii) Most loans from informal lenders carry a very high interest rate 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 areas, so that the dependence on informal sources of credit reduces.

On the top of a 10 Rupee note “Reserve Bank of India, Guaranteed by the Central Government is written.”

It implies that the notes are issued by Reserve Bank of India on behalf of the Central Government. This means that the currency is authorised or guaranteed by the Central Government and no one can refuse payment made in it.

Double coincidence of wants is an essential feature in a barter system where goods are directly exchanged without the use of money. But on other hand in an economy where money is in use, money by providing the crucial intermediate step eliminates the need for double coincidence of wants. A person holding money can easily exchange it for any commodity or service that he or she might want.

For example: It is no longer necessary for the shoemaker to look for a farmer who will buy this shoes and at the same time sell him rice. All he has to do is find a buyer for his shoes. Once he has exchanged his shoes for money he can purchase rice or any commodity in the market.

Banks keep only a small proportion of their deposits as cash with themselves. Banks use the major portion of the deposits to extend loans. There is a huge demand for loans for various economic activities. Banks make use of the deposits to meet the loan requirements of the people.

In this way, banks mediate between those who have surplus funds (the depositors) and those who are in need of these funds (the borrowers).

Banks charge a higher interest rate on loans than what they offer on deposits. The difference between what is charged from borrowers and what is paid to depositors is their main source of income.