Category: Commerce Notes PPT

The Elasticity of Supply is one of the most important chapters of Class 11 Economics. The following article is perfectly designed to portray the price elasticity of supply formula and several other things in light of the law of supply. The elasticity of demand and supply is nothing but the relationship between the price of a particular commodity and the quantity demanded or supplied of that particular commodity. There are various types of markets in the economy. Surprisingly, the elasticity of supply holds for every type of market.

 

Define Elasticity of Supply

The quantitative correlation between the price of a commodity and the quantity supplied of that commodity is known as the elasticity of supply. The above elasticity of supply definition stands perfect for all types of markets. Therefore, the mathematical alteration in supply with the change in the price can be derived from the concept of elasticity of supply. There are also a few other determinants of elasticity of supply. 

The most significant factor controlling the supply of a particular good is the price of the good. Mathematically, the value can be derived using the elasticity of the supply formula. The elasticity of the supply formula is as follows:

[Es = (frac{triangle{q}}{q})times100 div (frac{triangle{p}}{p}) times100 = (frac{triangle{q}}{q}) div(frac{triangle{p}}{p})]

Here, [triangle{q}] stands for the change in quantity supplied

           q Stands for the quantity supplied

           [triangle{p}] stands for the change in price

           p stands for the price 

 

Apart from the above-mentioned technique to calculate the elasticity of supply, there are another two methods to derive the elasticity of supply formula. Those two formulas are based on the supply curve. One is point elasticity in which elasticity can be calculated at a specific point of time and another is arc elasticity in which the same is calculated between two prices.

Point elasticity of supply formula: Es= (dq/dp) [times] (p/q)

Arc-elasticity of supply formula: [Es= frac{(q_1−q_2)}{(q_1+q_2)} times frac{(p_1+p_2)}{(p_1−p_2)}]

Various Types of Price Elasticity of Supply in a Single Graph

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1. Perfectly Elastic Supply:

If there is infinite elasticity, then it is considered a perfectly elastic supply. In this scenario, with a minor fall in the price level, the supply will become zero and with a minor rise in the price, the supply will become infinite. The perfectly elastic supply example is that in such a market the suppliers desire to supply any quantity of the commodity if there is a higher level of price. A perfectly elastic supply curve is depicted as a straight line that is parallel to X-axis. 

2. Unit Elastic Supply:

If the change amount supplied is exactly equal to the change in its price, then it is termed as unit elastic supply or unitary elastic supply. In the above-mentioned scenario, the price elasticity of supply is equal to 1.

3. Relatively Greater-Elastic supply:

Relatively greater elastic supply occurs when the change in supply is relatively greater as compared to the change in price. In this case, the value of price elasticity of supply is greater than 1.

4. Relatively Less-Elastic supply:

Relatively Less Elastic supply occurs when the change in supply is relatively lesser as compared to the change in price. In this case, the value of price elasticity of supply is less than 1.

5. Perfectly Inelastic Supply

A service or commodity is termed as perfectly inelastic when a certain quantity of the said commodity can be supplied irrespective of the price. The value of the price elasticity of supply is zero.

What is Price Elasticity?

The economic concept which is used to measure the change in the aggregate quantity that is demanded of a good or service when there is a movement in the price of that good or service is referred to as price elasticity. If the quantity demanded of a product shows a big fluctuation when its price is increased or decreased then the product is said to be elastic. If the quantity demanded of a product does not change much when its price is increased or decreased then the product is said to be inelastic. There are four types of elasticity which are-

1. Elasticity of Demand

2. Income Elasticity

3. Cross Elasticity

4. Price Elasticity of Supply

Let us study the Price Elasticity of Supply in detail.

Price Elasticity of Supply

The measure of the responsiveness of the supply of goods or services after there is a change in its price is known as price elasticity of supply. The supply of goods, according to economic theory, increases as the price rises and as the price decreases, the supply also decreases.

To determine the price elasticity of supply following points are needed to be considered-

• Ease of switching- The supply of products is more elastic when the production of the goods can be varied.

• Length of production period- The response to a quick production is easier than a price increase.

• Factor mobility- The supply curve is more elastic if moving the resources into the industry is easier.

• Number of producers- The entry into the market is easier.

• Ease of storage- The elastic response will increase the demand if the goods can be stored easily.

• Spare capacity- When there is a shift in the demand it becomes easy to increase production.

The formula for Price Elasticity of Supply

The price elasticity of supply can be calculated by the percentage change in the quantity supplied to the percentage change in the price of the product.

[{text{Price Elasticity of a Supply}} = frac{text{% change in Quantity Supplied}}{text{% change in Price}}]

• When the price elasticity of supply is >1, the supply is elastic.

• When the price elasticity of supply is<1, the supply is inelastic.

• When the price elasticity of supply is 0, this means there is no change in the prices.

The factors that affect the price elasticity of supply are-

1. The nature of the industry- The nature of the industry under consideration is a very important factor that affects the price elasticity of supply.

2. Nature-constraints- Nature can restrict the supply of some products. For example- It takes 15 years for a rubber tree to grow.

3. Risk-Taking- The willingness to take risks by the entrepreneurs also affect the price elasticity of supply.

4. Nature of goods- Another important factor that can affect the price elasticity is the availability of the products.

5. Definition of commodity- The price elasticity of supply is great if the commodity is defined narrowly.

6. Time- In the long run, supply is considered to be more elastic as compared to that in the short run.

7. The cost of attracting resources- Attracting the resources from the other industries is an important factor to increase the supply.

8. Level of price- Different prices can vary the price elasticity of supply.

9. Factor mobility- The price elasticity will be greater when the mobility of the services is high.

Determinants of Elasticity of Supply

The determinants of elasticity of supply are as follows:

1. Number of producers

2. Spare capacity

3. Effortlessness of switching

4. Ease of storage

5. Length of the period of production

6. The time frame of training

7. Mobility of factors

8. Reaction of costs

 

Did You know?

• Price elasticity of supply depends upon the tenure of the production. This means it is different in the long run and the short run.

• Availability of raw materials is one of the important factors affecting the elasticity of supply.

• The elasticity of demand and supply is the backbone of microeconomics. 

• A perfectly elastic supply curve is horizontal to the axis.

Equilibrium is that state of rest where no change is required. When spoken in terms of producer’s equilibrium, it means that any firm or company that produces a product or service has reached a level of output where it does not wish to either expand or contract it. This producer’s equilibrium state could be of maximum profit or minimize losses.

Profit 

Profit is the amount gained from any business deal. Whenever a businessman advertises to sell his product, he aims to gain some benefit from his client in the name of profit. So he deals in such a way that he makes bids higher than his product’s original price or how much it cost him initially, then if the client agrees, he gets the profit on it but if he has to sell it for less than its original price then he is at a loss.
Basically, the selling price should be more than the original price of the product if you want to have profit. 

 

The concept of profit and loss is basically what defines any business. Any financial gain in the business goes straight to the owner of the business. 

 

If the selling price or cost price is more then,
Profit/ Gain = selling price – cost price 

 

If the product is sold at price lesser than cost price then,
Loss= cost price – selling price

 

Producer’s Equilibrium

An organization is under equilibrium if there is no increase or decrease in it’s profits. This equilibrium bubble is when the company is gaining its maximum profit.  

 

Producer’s equilibrium is the output where the producer gets maximized profits. So a producer can reach a producer’s equilibrium if his profits are at their highest levels. An organization is in equilibrium if there is no scope for either increasing the profit or reducing its loss by changing the quality of the output. Therefore, we have

 

Profit  = Total Revenue – Total Cost
Which is written as  P=  TR – TC

 

Hence, the output level at which the total revenue minus the total cost is maximum is the equilibrium level of the output. There are two approaches to arrive at the producer’s equilibrium:

Total Revenue – Total Cost (TR-TC) Approach

Marginal Revenue – Marginal Cost (MR-MC) Approach

 

In order to find the producer’s equilibrium, it is important to learn about isoquant curves and iso-cost lines. By understanding these two concepts, you can calculate optimum production.

 

Isoquant Curves

These curves are also known as equal-product curves as the lines represent various combinations of inputs that produce the same level of outputs. So the company has several combinations to choose from because, in the end, they will be giving the same output.

 

Isocost Lines 

These lines show how we can invest in two different factors to produce maximum profit. 

Methods of Determining Producer’s Equilibrium 

There are mostly 2 methods used in  determining the producer’s equilibrium for any firm.

1. TR – TC Approach – This is the total revenue total cost method. As per this method, there are two conditions to meet the producer’s equilibrium. 

1. Difference between Total revenue and the total cost is positively maximized.

2. Profits fall after this level of output even if one more unit of output is produced. 

Two situations can arise in this case.

 

In the table above we can mark that profit rises first and then becomes a maximum at Rs.10 with 3 and 4 units produced. After that, profit begins to decline. Hence, in this case, the maximum profit is reached at 3 or 4 units of production. However, the producer’s equilibrium would be said to reach 4 units of production because both conditions stated above (TR-TC is maximum and profits fall after this point) should be met.

 

 

Here initially with price coming down, profit goes up and is maximum at 3 and 4 units. After this, the profit starts declining. So fulfilling both conditions of Producer’s equilibrium, we get it at 4 units of output.

 

2. MR – MC Approach – This is called the marginal revenue marginal cost method which is derived from the TR-TC approach under the condition that marginal revenue is equal to  Marginal cost. So till the point, MC is less than MR, the firm would keep producing products till she or he hits the level of equal MR and MC. MC > MR after the output level is reached as it is not a sufficient condition to reach the producer’s equilibrium. For any additional unit of production, MC must cut the MR curve from the below.

Here, MR is an additional amount earned over and above TR (total revenue) when more than 1 unit of product is sold. MC is an additional cost incurred over and above TC when more than 1 unit of product is produced. We will now examine this approach with the following 2 situations.

• When price remains constant – When the price is fixed, firms can sell any amount of product. In this case, revenue from each additional unit, i.e., MR is equal to AR or the price. AR and MR curves would be the same in this scenario. So this would mean that price is equal to MC at all levels of output. Producers would aim to produce to a point where MC = MR and MC > MR after it reaches MC = MR output level. 
• When the price falls with output increase – The MR curve would slope downward if there is no fixed price and there is a fall in price when output increases. In this case, producers would aim to produce to a level where MC = MR and MC curve cuts the MR curve from below. This is depicted in the below producer equilibrium graphical presentation.

A student might have noticed that the liabilities side of the balance sheet includes an entry referred to as provisions. Understanding how and why such a provision is necessary for accounting will be a benefit that one can get from reading this article.

Definition of Provisions

A provision refers to the amount that is typically set aside from profits in order to cover probable future expenses or an asset reduction, although it is uncertain exactly how much is set aside.

Despite the fact that provision cannot be considered savings, it can be viewed as a method of identifying any potential liabilities in the future.

The majority of the time, a provision is used as a reserve. However, a provision is different from a reserve. Reserves are part of a profit that is set aside to be used to assist the company’s growth and expansion. A provision is set up to cover probable liabilities in the future, while a provision covers probable future assets.

The Provision in Accounting

A matching principle states that every expense incurred in a given year must be reported alongside the revenue gained. By doing this, it will prevent financial statements from looking misleading if costs related to a certain year appear on previous or future balance sheets.

Provisions, therefore, ensure that revenues and expenses are included within the same accounting period, balancing the balance of the current year.

Provisions – Why are they Created?

It is important to create provisions for a specific purpose since they account for corporate costs that will need to be paid in the same year. Creating the provision is beneficial to the company since it also makes its financial statements more accurate.

Having set aside this amount does not represent a form of savings, as the expense is estimated and is expected to be spent.

Is a Provision a Reserve?

A reserve is not considered a provision if it does not exist.

In contrast, a provision is a fund that is allocated for a specific expense, whereas a reserve is one that is formed from the profit made by the company. In a reserve account, money is held that is readily accessible. The money can be accessed from the savings account, for example. 

Owners’ associations, for example, may use reserve funds. A reserve fund may also have been set aside for unscheduled repairs. The exact reason for the repairs is unknown, nor are the exact costs associated. They only know that repairs will be needed at some point. 

As an example, an automobile company could set aside money itself for the repairs under warranty that have occurred within the last year. 

An Example of a Provision in Accounting

The majority of provisions are associated with bad debts. An accounting period is calculated by adding up the cost of the remaining unpaid debts.

Examples of provisions are:

1. Doubtful debts

2. Depreciation

3. Pension

4. Restructuring liabilities

5. Income taxes

6. Guarantee (product warranties)

Debenture is basically a form or format prepared for a long term debt or loan that the companies or firms used to take for borrowing money from the public. Though the borrowers agree to pay or refund the debenture amount to the lender after the completion of the tenure but still they often remain unsecured.The loan is usually secured by the companies or firm’s secured assets in India and most of the countries. However in the United States they remain unsecured.

Redemption of debentures means to repay or clear all the standing debts and loans to the debenture holder or the lender who gives the loan, basically settling the loan after the expiry of its tenure. It comes along with a set of terms and conditions agreed by both the parties on the matter of repayment of the loan or debts. 

Redemption of Debentures is defined as the settlement of borrowed funds by a company or a firm to their debenture holders after the date of maturity. After the funds are repaid, the liability on the debenture account is discharged. 

 

What is Debenture Redemption Reserve (DRR)?

A debenture redemption Reserve can be referred to as a provision which states that any company, firm or enterprise in the country which issues debentures are required to open a redeeming service of the debenture to show an effort to ensure repayment of borrowed funds. 

 

As per the Indian Companies Act of 1956, all companies who issue a debenture need to create a debenture redemption reserve before the maturity date of a specific debenture. According to this Act, companies need to represent at least 25% of the face value of the issued debentures.

 

For example, let’s say that a company ABC Pvt Ltd. issues Rs. 20 lakhs in debentures on the 1st of April of 2020 with a maturity date of March 2025. Here, as per the companies act, ABC Pvt Ltd. needs to assemble 25% of Rs. 20 lakhs as debenture redemption reserve before the maturity date of the debenture. 

 

Companies are not required to arrange funds for the debenture redemption reserve just after issuing the debenture. They are allowed to credit funds into the DDR account by an adequate amount each year until the maturity date.

 

Methods of Redemption Reserve

There are several methods by which the redemption of debentures can take place. Each method follows a unique accounting treatment. These approaches can be classified under the following categories :

• Payment in lump-sum on the debenture’s maturity.

• Payment in instalments after the maturity date.

• Redemption through the purchase of the debenture on the market.

• Redemption through the conversion of debentures into new debentures or equity shares.

For a clear understanding, check a tabular representation : 

 

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1. Payment in Lump-Sum on the Debentures Maturity

In such cases, the debenture is redeemed by the company in a lump-sum amount as a one-time payment at the end of the maturity period. The amount, as well as the maturity date, will be as per the terms discussed during the issuance of the debenture.

 

As the company is aware of the date of maturity, they can prepare their finances in advance. This one-time payment of such a lump-sum amount also includes the funds set aside in the debenture’s redemption reserve account.

2. Payment in Installments after the Maturity Date of the Debenture

In this method of redemption of debentures, repayment of the borrowed funds takes place through a series of installments in a regular or irregular fashion as per the terms of the conditions of the redemption of the said debenture.

3. Redemption Through the Purchase of the Debenture on the Market

In this case, companies and firms are willing to purchase their debentures on the market. They can also choose to cancel them immediately; in such a way, the company can prolong the maturity of the debenture until the payment is suitable for its financial capabilities.

 

Moreover, if the purchase of the debentures on the open market is made at a discount, the company can avail the opportunity of lowering the overall redemption payment, thereby improving the overall business revenue.

4. Redemption Through the Conversion of Debentures

Redeemable Debentures also offer the facility of conversion into a new type of debenture or an equity share of the concerned company. The terms and conditions of the conversion of such a debenture are addressed to the holder during the issuance of the debenture.

 

This kind of debenture is termed as convertible debentures. Such debentures are converted to new debentures, or equity shares can be issued by the company at par, for discount and even at a specified premium.

 

According to Rule 18(7) of the Companies Share Capital and Debenture Rules 2014 at least 15% of the face value of the debenture amount is to be redeemed during the year the company is making investments in specified securities. This is required to be done within the 30th of April of the maturity year.

 

Finally, companies should also keep in mind that the DRR account is required to be opened in any financial institution of the country which is authorised by the Reserve Bank of India.

 

Did you find our lecture on Redemption of Debentures interesting? At we offer study materials of various other subjects of Class 11 and 12 Commerce. We also offer online tutoring and live classes on Science subjects as well. Make sure to visit the official website of and take part in our online learning program!

In the world of commerce, the two words ‘capital’ and ‘revenue’ are among the fundamental concepts. These concepts form the basis of the economy of a nation.

From observing our country’s financial position, it is important to draw certain conclusions regarding revenue collections and the corresponding expenditure as it determines the country’s financial health. 

Before we dive deep into such an analysis, it is important to understand the concepts of ‘capital’ and ‘revenue.’

Capital refers to the liquid assets (generally in the form of cash) that are procured by a company to be used for its expenses. This is a general idea of capital, but if we expand its definition under financial economics, the capital that is held by a company is also known as its capital assets.

Revenue, on the other hand, refers to the income that is generated by a company/business in the form of discounts or deductions for the goods returned. Revenue comprises the overall income of a business or the gross income where business operations costs have not been considered. The deduction of costs from revenue shall reveal the net income of a business.

So, now that we know the meaning of capital and revenue, the next question here is, how do these affect the economy of a nation? The answer to this lies under the notion of Revenue Account and Capital Account. 

The revenue account and capital account were established to understand the national income and expenditure better. Let’s get to know about them in detail.

What is a Revenue Account?

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As revenue includes the income earned by a business, a revenue account is essentially an account that contains the receipts of this income. Such an account includes the income from the operations in hand. 

Let us consider the government like a business. Now, just like a common business, the government also generates income by carrying out various operations. In this case, these operations include

1. Revenue from Tax: Tax revenues from taxes on imports and productions that can be both the direct revenue and indirect revenue.  

1. Direct Tax Revenue: Such revenue is generated when the government receives income tax and corporate tax.

2. Indirect Tax Revenue: Such revenue is generated through service tax, excise duties, and custom export and import duties.

2. Revenue from Sources Other than Tax: While tax revenue makes the major portion of income for the government, other sources such as profits from public sector industries, interests of investments, dividends, and certain penalties or fees are known as non-tax revenue. 

Did You know?

Corporate gains are taxed twice. A corporation’s profits are taxed two times- first as corporate tax and second as a tax on dividends.

A revenue account keeps a record of all such revenues collected by the government and represents the nation’s gross income.

What is a Capital Account?

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The second type of account associated with the government is the Capital account. As the name suggests, a capital account holds the record of the capital assets and liabilities related to the government. It includes payments and capital receipts of the government.

So, what could be the assets and liabilities of the government? To put it simply, they are similar to any other business. The capital of a business is the money or liquid assets it generates throughout its operation. So, for the government, this asset is generated from 

• Capital generated from Public loans or Market loans

• T-Bills or Treasury Bills that refer to the finances borrowed from banks

• Other loans that are sanctioned by foreign government or institutions outside the country

• Capital may also be generated from withdrawing or deduction of public sector/unit investments.

As every business face liability as debt, the government also has certain liabilities in the form of pension payments, government bills or bonds, or the payment of goods and services that the government has acquired but has not paid for yet. 

Both the government assets as well as liabilities are accounted for in the Capital account. This account keeps a record of the nation’s total assets and liabilities during a single financial year and the net change in both of them. The account balance of a capital account decides whether a country is an apparent exporter or importer of capital.

Terminologies Related to Capital Account

• Voucher: It refers to any written documentation in favor of the entries reported in account books and helps in indicating the accuracy of the transaction’s accounting.

• Financial Accounting: it is a particular type of accounting that considers a method of summarising, documenting, and reporting the transactions that arise due to business operations.

• Tender: itis an offer formulated to perform some task or to provide goods at a certain fixed price.

• Escalator Clause or Escalation Clause: these clauses refer to the provisions made by the company that allows for an automatic increase in the wages or prices of their employees or products.

• Financial Structure: it refers to the way in which the firm’s assets are actually financed.

• Coopetition: it refers to the combination of competition and cooperation between companies. 

What is Capital Expense? 

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A capital expense or capital expenditure refers to the government’s amount of cost or a business organization for buying assets. The assets bought through capital funds are fixed assets such as machinery, equipment or property, etc.

Buying and selling assets is an integral part of running a business. It is useful in expanding the business operation to build future capital and secure financial assets for future use. 

For a government, capital expense means enhancing the assets and reducing liabilities. It can do so in the form of loan repayment where the loan represents a liability, and hence by repaying the loan, the government cuts down liability.

What are the Examples of Capital Expenditure?

Capital expenditure refers to an expenditure that acquires a capital asset. The examples of capital expenditure are

1. Expenditure made for the acquisition of fixed assets like land, building, machinery, furniture, motor vehicle, workspace, and more comes under capital expenses.

2. Expenditure made for improving or extending the fixed assets, that is, furniture, machinery, and workspace, for example, increasing the seating capacity of a theatre comes under capital expenditure.

3. Expenditure made to bring the fixed assets to the place of their use and expenditure made on the installation of required machinery or on erection such as freight on fixed assets, wages paid for installation, and others are also counted under capital expense.

4. Expenditure invested for the purchase of intangible assets such as goodwill, patent rights, trademarks, copyright, and more are also a part of capital expense.

5. Expenditure made for reconditioning or renovation of old fixed assets such as money spent on repairing or overhealing of secondhand machinery comes under capital expense.

6. Money spent on major repairs and replacement of plants that increase the efficiency of the plant is also counted in capital expense.

7. The cost paid for shifting a plant from one place to another place is also a part of capital expenditure.

What is Revenue Expense?

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An idea that goes hand-in-hand with the capital expense is Revenue expense or revenue expenditure. Revenue expenditure includes the costs incurred by a business that works as current expenses, i.e., these costs are not incurred as a means of asset creation or removal of liabilities.

The government’s revenue expenses are made in the form of payment of salaries and wages, grants, advertising, rent or costs of sold goods, etc. 

While the concepts of capital expense and revenue expense may seem similar at first glance, there is a significant difference between the two.

Difference between Capital Expense and Revenue Expense

Agriculture is the primary source of income of individuals residing in the rural regions across India. Every year, farmers and peasants need to invest a considerable amount of funds to ensure a healthy harvest. Thus, they often resort to borrowing money from moneylenders and financial institutions to fulfill their basic needs before harvest season arrives, and they can earn money by selling their crops.

Thus, any loan taken for agricultural purposes or small home businesses across the rural areas in India is known as a Rural Credit.

Sources of Rural Credit 

Simply understanding what Rural Credit means is not enough. Commerce students also need to learn the various sources from which such monetary assistance is available to rural families. Listed below are the five major sources for Rural Credit in India.

1. Land Development Banks 

These banks provide a considerable sum of money as a credit to farmers by using their land as collateral. This low-interest loan has a repayment tenure ranging between 15 and 20 years. Farmers are free to avail this loan to bear the cost of land development work, including the creation of wells or other irrigation related facilities.

Still, land development credits are underutilized since most farmers remain unaware of this source of funding.  

2. Co-operative Credit Societies

One of the most economical sources of funding for farmers, co-operative credit facilitates credit to small- and medium-scale farmers. These short-term credits are extended by Primary Agricultural Credit societies or PACs. Nonetheless, these societies have not been able to minimize the influence of moneylenders on the Rural Credit market.

3. Regional Rural Banks

Set up by the government, regional rural banks or RRBs extend monetary assistance to marginal farmers, landless laborers and artisans.

4. Commercial Banks

Originally, commercial banks were reluctant to provide credit for agriculture due to the risks involved with such a move. However, today, these banks extend monetary help both directly and indirectly, to farmers. Direct investment in agriculture refers to short and medium term loans to simplify farming activities. Indirect investment, on the other hand, refers to the advances to farmers made through intermediary agencies or institutions.

5. Government

Also known as Taccavi loans, these are short-term credits extended by the Indian government to assist struggling farmers, especially in the aftermath of natural calamities, such as floods and droughts.

Quick Question

Q. What is the Full Form of RRB and PACs?

A. RRB stands for regional rural banks. PACs stands for Primary Agricultural Credit societies.

Types of Rural Credits

• Short Term Credit – These loans have a limited repayment tenure that can range up to one year at the most. Therefore, such credits can act as a brief business or private capital requirement for farmers and others in a rural setting.

• Medium Term Loan – Any loan that has a tenure ranging from two years to less than 10 years is classified as a medium-term loan. The credit amount available varies from one firm or individual to the next, depending on the credit rating and a host of other factors.

• Long Term Loan– These are considerable sums that farmers can avail for a tenure ranging between 5 years and 20 years. In agriculture, such a line of credit is useful in creating permanent assets. For example, with the help of such a loan, farmers can purchase tractors and other farming properties.

Multiple-Choice Question

Q. What is the Tenure for Medium-Term Rural Credits?

1. One to five years

2. Five to ten years

3. Two to ten years

4. Ten to twenty years

Ans. (3) Two years to ten years

Importance of Rural Credit in India 

Rural Credit is Necessary for the Following Reasons –

• The gestation period in agriculture is significant, which means that the period from sowing the crop to selling the produce is vast. Therefore, Rural Credit helps farmers with their livelihood until the crops are ready for sale in the market.

• The credit can help farmers acquire seeds, tools, fertilizers, and more, which are essential parts of their trade. 

• Another valid reason for availing of Rural Credit is to mitigate personal expenses, such as marriage, religious functions, death, and more. Additionally, such financial assistance can also aid in repaying outstanding debts.

Multiple-Choice Question 

Q. Mr X is looking to build a well on his farm. Which of the following forms of Rural Credit is Perfect for this Purpose?

1. Long-term credit

2. Medium-term credit

3. Short-term credit

4. None of the above

Ans. (1) Long-term credit

To acquire a better understanding of Rural Credit and its types, students can join ’s online commerce classes. Conducted by expert members, these classes strictly follow the CBSE class 11 and class 12 curriculums.

Evolution of Rural Credit 

The Rural Credit system in India is separated into two parts: an unstructured or informal system of lenders, merchants, and input suppliers, and a formal, organized system made up of cooperatives, regional rural banks, the banking sector, and nonbanking financial enterprises. In recent years, the need to improve formal credit institutions has been justified not just by the need for contemporary inputs, but also by usurious money lending practices that could not instead be successfully resisted. The ideological commitment of India to fostering a “cooperative commonwealth” also had a role, particularly in building cooperative credit organizations at all levels.

The Real Need for Rural Finance 

Many of the issues with rural financial services stem from a misconception of the nature of the income effect for these services[60]. The first misperception was that peasants and other rural inhabitants required finance primarily for agricultural output. In reality, an appropriate demand for credit can exist, backed up by a desire and capacity to afford, to balance out a variety of scenarios when income and spending streams are poorly timed. Non-agricultural credit may be as essential as agriculture loans. Indeed, for many rural residents, the most significant reason for seeking credit is as a utilization loan to cover living expenses in the months until the next harvest, rather than to acquire inputs to increase agricultural output. The second misperception was that most impoverished farmers were unable to repay loans, implying that there had to be credible but no effective demand. The research today indicates that impoverished families are both capable and willing to repay loans if they take for their own stated needs and are properly vetted and supervised.