Commercial banks mediate between those who have excess funds and thos…

Commercial banks mediate between those who have excess funds and those who need funds. In rural areas, Self-Help Groups play a similar role on a small scale because they:

Answer & explanation

Correct answer: option 3

The correct answer is Option (3) → pool small savings of members and give credit to needy members

Banks take deposits from people with spare funds and lend to those who need funds. An SHG does the same on a small scale: members make small contributions, and the pooled money is lent to needy members.

Option (1) issue currency that acts as high-powered money — Incorrect. Only the central bank (RBI) issues currency.

Option (2) coordinate the activities of all rural financing institutions — Incorrect. That is the role of NABARD, the apex body.

Option (3) pool small savings of members and give credit to needy members — Correct. This is the SHG’s link between savers and borrowers.

Option (4) keep their reserves with the Reserve Bank of India — Incorrect. It is commercial banks that keep reserves with the RBI.

This question uses Rural Development and Money and Banking together.

NCERT (2026-27): “5.3 Credit and Marketing in Rural Areas … Recently, Self-Help Groups (henceforth SHGs) have emerged to fill the gap in the formal credit system because the formal credit delivery mechanism has not only proven inadequate but has also not been fully integrated into the overall rural social and community development. Since some kind of collateral is required, vast proportion of poor rural households were automatically out of the credit network. The SHGs promote thrift in small proportions by a minimum contribution from each member. From the pooled money, credit is given to the needy members to be repayable in small instalments at reasonable interest rates. …”

Money and Banking: “… Commercial banks mediate between individuals or firms with excess funds and lend to those who need funds. People with excess funds can keep their funds in the form of deposits in banks and those who need funds, borrow funds in form of home loans, crop loans, etc. …”