Page 67 - Understanding Economics for Class 10

Loan activities of Banks
Bank accepts deposits from public and pay interest on those deposits. This brings an interesting
mechanism- how do banks work? What do the banks do with the deposits which they accept
from the public?
Goyal Brothers Prakashan
 Banks operate by accepting deposits from the public and engaging in various financial
activities. They keep a portion of the deposits as cash reserves to meet withdrawal demands,
while the rest is used to provide loans for economic activities.
 Acting as intermediaries, banks facilitate the flow of funds between depositors with surplus
funds and borrowers in need of funds.

 They generate income by charging borrowers higher interest rates on loans than the interest
paid to depositors. This interest rate differential serves as the main source of revenue for banks.

intext question (Page No. 42)
1. What do you think would happen if all the depositors went to ask for their money at the
same time?
Ans. If all the depositors went to ask for their money at the same time, banking system will
not be able to work. In such a situation, bank will not be able to meet the obligations of
all the depositors and therefore, run shortage of funds, due to which it cannot lend money
and hence there will be no source of income for the banks. Banking System can collapse
in such a situation.

two different credit situations
Credit is involved in some form or the other in large number of transactions in our day-to-day
activities. Credit (loan) refers to an agreement in which the lender supplies the borrower with money,
goods or services in return for the promise of future payment. Examples to show how credit works.
festival season
 Two months from now is the festival season. Salim, a shoe manufacturer, has got an order
of 3,000 pairs of shoes from a large trader and it has to be delivered in a month time.
 Salim has hired a few more workers for stitching and pasting work so that he can complete
order on time. He also has to purchase raw materials.
 Salim obtains loans from two sources to meet all the expenses.
 First, he asks the leather supplier to supply leather now and promises to pay him later.
 Second, from the large trader he gets loan in cash as advance payment for 1000 pairs of
shoes with a promise to deliver the whole order on time.
 Salim completed and delivered the order at the end of the month, he makes good profit,
and repay the money that he had borrowed.
 Credit plays a crucial role for Salim by providing the necessary funds for working capital,
enabling him to cover production expenses, meet deadlines, and ultimately enhance his earnings.
swapna’s problem
 There is a small farmer, Swapna who grows groundnut on her three acres of land.
 To meet the expenses of cultivation, she takes a loan from the moneylender and she hopes
that she would be able to repay the loan by producing good harvest.
 Despite of spraying expensive pesticides, the crop fails because the crops are hit by pests
in the midway of the season.
 Because of her inability to repay the moneylender, her debt grows over the year into a
large amount.

E-58 Economics Class X