Class 7 Social Science Exploring Society Chapter 20 Solutions (NCERT 2026–27) – Banks and the Magic of Finance

These Class 7 Social Science Exploring Society Chapter 20 solutions cover Banks and the Magic of Finance from Exploring Society: India and Beyond (Part 2), the new NCF-2023 textbook for the 2026–27 session. The chapter belongs to the theme Economic Life Around Us and explains what financial infrastructure is, what banks do, how interest and compounding make savings grow, the role of the Reserve Bank of India, modern payment systems like UPI, the stock market, and how to stay safe from financial fraud. Below you get step-by-step answers to all Questions and activities, clear notes on key terms, extra practice, MCQs, Assertion–Reason and FAQs.

Class: 7 Subject: Social Science Book: Exploring Society: India and Beyond (Part 2) Chapter: 20 Theme: Economic Life Around Us Session: 2026–27
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Class 7 Social Science Exploring Society Chapter 20 – Overview

Chapter 20, Banks and the Magic of Finance, explains how money moves between people, businesses and the government through financial infrastructure — a network of banks, payment systems, stock markets and other financial institutions. A bank collects money from people as deposits (in savings, current and fixed deposit accounts) and lends it to others as loans. Banks pay a lower rate of interest to depositors and charge a higher rate to borrowers, and this difference is their income. The chapter shows the ‘magic’ of compounding — earning interest on interest — through the famous chessboard-and-rice story. It introduces the Reserve Bank of India (RBI) as the banker to banks, the Pradhan Mantri Jan Dhan Yojana, post offices and institutions like NABARD, modern payment modes (cash, cheque, debit card, internet banking, UPI), the stock market and shares, and how to guard against financial fraud.

Key Concepts & Terms

Financial infrastructure: a network of banks, payment systems, stock markets and other financial institutions that help people, businesses and the government carry out financial transactions and manage money.

Bank: a financial institution that collects money from people in the form of deposits and lends money to people or borrowers as loans.

Deposits: money placed in a bank account that can be withdrawn as per the terms of the bank and often earns interest. The three account types are the savings account (for individuals who save regularly and earn interest), the current account (for businesses and traders, no interest but no limit on transactions) and the fixed deposit account (a one-time deposit kept for a fixed period that earns higher interest).

Interest: the amount charged for borrowing money or gained by lending money, usually expressed as a percentage.

Compounding: the process of earning interest on previously earned interest, so savings grow faster over time. (For example, ₹1000 at 6% grows to ₹1060 after one year and ₹1123.60 after two years.)

Loan: an amount borrowed from banks or financial institutions, with the obligation to repay it with interest at a later time.

Reserve Bank of India (RBI): India’s central bank, established in 1935; the banker to banks since 1949. It supervises the banking system, prints and distributes currency, and fixes benchmark interest rates.

Benchmark interest rate: the base interest rate that the RBI fixes for lending money to commercial banks.

Payment system: a mechanism that facilitates the clearing and settlement of financial transactions, allowing individuals, businesses and organisations to transfer funds. Examples include cheques, debit cards, internet banking and the Unified Payments Interface (UPI).

Share & stock market: a share is a unit of ownership in a company; a collection of shares is called stock. Shares are bought and sold at a stock exchange such as the Bombay Stock Exchange (BSE, established 1875).

Other key terms: Debit (taking money out of an account), credit (receiving money in an account), PIN (a numeric code used for authentication), OTP (a one-time password), and investment (putting resources in assets expected to gain value over time).

“Questions and activities” — Full Solutions

All questions below are reproduced verbatim from the NCERT textbook’s end-of-chapter Questions and activities section. Answers are original, written in exam-ready style.

1. What is financial infrastructure? How does it complement physical infrastructure?

ANSWER Financial infrastructure is the network of banks, payment systems, stock markets and other financial institutions that help people, businesses and the government carry out financial transactions and manage money. It promotes saving, credit and investment. How it complements physical infrastructure: physical infrastructure — roads, railways, telecommunication and so on — supports economic activities, but all those activities run on money-related transactions. Financial infrastructure makes those transactions possible: it moves money smoothly from one person to another and, importantly, it provides the funds needed to build and maintain physical infrastructure itself. For example, banks and institutions like NABARD give loans for roads, irrigation and businesses. Thus the two work together — physical infrastructure carries goods and services, while financial infrastructure carries the money that pays for them.

2. How does having a bank account help people? Should everyone be required to have a bank account?

ANSWER How a bank account helps: it keeps money safe instead of storing cash at home; it lets people deposit and withdraw money easily; it earns interest so savings grow over time; it allows people to take loans for needs like a house, education or business; and it enables direct transfers, so workers receive wages, students receive scholarships and farmers receive support straight into their accounts, reducing middlemen and delays. Should everyone be required to have one? Having a bank account brings clear benefits, so it is good if everyone has access to one — that is exactly why the Pradhan Mantri Jan Dhan Yojana opened over 50 crore accounts without a minimum balance or fees. It helps include the poor in the financial system and ensures timely delivery of benefits. However, rather than forcing it, the better approach is to make accounts easy, free and available to all, and to educate people so they choose to use them. (Accept reasoned views on both sides.)

3. What could be the possible advantages and disadvantages of compound interest for savers and borrowers?

ANSWER For savers (advantage): compound interest is a great benefit. Since interest is earned on the original amount plus the interest already earned, savings grow faster and faster the longer the money is kept — for example, ₹1000 at 6% grows to about ₹2012.20 in 12 years. The main disadvantage for a saver is that the money must be left untouched for a long time, and if interest rates are low the growth is slow. For borrowers (disadvantage): compounding works against a borrower, because interest is also charged on the unpaid interest. If a loan is not repaid on time, the amount owed can grow very large — just as the rice grains on the chessboard multiplied rapidly. The only ‘advantage’ for a borrower is that a loan gives them money now to meet an important need; but they must repay carefully to avoid the burden of mounting interest.

4. How does financial infrastructure enable the flow of money between households and businesses? Can you think of how the government can facilitate this flow?

ANSWER Flow between households and businesses: households deposit their surplus savings in banks. Banks then lend this money to businesses as loans, which they use for machinery, raw materials, transport and new products. Businesses pay wages to workers (households) and sell goods to them; households pay using cash, cheques, debit cards or UPI. The stock market lets households invest in companies by buying shares, and lets businesses raise funds by issuing shares. In this way money keeps circulating between households and businesses through banks, payment systems and the stock market. How the government can facilitate the flow: the government can ensure everyone has a bank account (as with the Jan Dhan Yojana), support fast, free payment systems like UPI, set up institutions like NABARD to fund farming and rural development, and make clear rules through the RBI so that the system is safe and trustworthy. It can also transfer wages, pensions and scholarships directly into bank accounts, which keeps money flowing and reduces middlemen.

5. What could be the reason for the higher interest rate earned on fixed deposits as compared to a savings account?

ANSWER A fixed deposit is a one-time deposit kept with the bank for a fixed period, such as 3 or 5 years, during which the depositor cannot withdraw it. Because the money stays with the bank for a guaranteed, longer time, the bank can confidently lend that money to borrowers and earn income from it. A savings account, on the other hand, allows the depositor to add or withdraw money frequently, so the bank cannot be sure how long the money will stay. Since a fixed deposit gives the bank greater certainty and a longer use of the funds, the bank rewards the depositor with a higher rate of interest than it pays on an ordinary savings account.

6. Sahil received ₹10,000 as a prize in a poster-making competition. His father promises to pay him 12 per cent interest per year if he does not spend the amount. After 3 years, how much money would Sahil have?

ANSWER Here the interest compounds each year (interest is earned on the previous year’s total, just like in the chapter). Principal = ₹10,000 and rate = 12% per year. End of Year 1: Interest = 12% of 10,000 = ₹1,200. Total = 10,000 + 1,200 = ₹11,200. End of Year 2: Interest = 12% of 11,200 = ₹1,344. Total = 11,200 + 1,344 = ₹12,544. End of Year 3: Interest = 12% of 12,544 = ₹1,505.28. Total = 12,544 + 1,505.28 = ₹14,049.28. So, after 3 years Sahil would have ₹14,049.28 (about ₹14,049). This shows the power of compounding — the interest earned grows larger each year.

7. How does the stock market help mobilise the savings of individuals? In what ways do companies benefit by issuing shares to people?

ANSWER Mobilising savings: the stock market lets ordinary people put their savings to work by buying shares of companies. When a person buys a share, they become a part-owner of that company and hope the value of the share will rise over time, giving them gains. In this way, money lying idle as savings is channelled into companies, where it can be used productively. How companies benefit by issuing shares: by issuing shares, a company can raise funds for its operations — to expand the business, buy machinery, launch new products and so on — without having to take a loan and pay interest. The money comes from many shareholders who become part-owners. Thus the stock market connects people who have savings with companies that need money, benefiting both sides.

8. How can we balance the convenience of digital payments with the risk of cyber fraud?

ANSWER Digital payments such as UPI, debit cards and internet banking are fast, convenient and reduce the need to carry cash. But they also bring the risk of cyber fraud, where fraudsters trick people through fake calls or messages to steal bank details or OTPs. To balance convenience with safety we should: never share personal information like phone number, account number, passwords or OTPs with strangers; avoid clicking unknown links or videos received through messages; not store sensitive banking information such as passwords and PINs on devices; and use only trusted, official apps. We should also stay alert to suspicious messages. If fraud does happen, we must report it immediately on the helpline 1930 or the National Cybercrime Reporting Portal (cybercrime.gov.in). By being careful and informed, we can enjoy the convenience of digital payments while keeping our money safe.

9. Ask your family members or neighbours about—

• how they save money?• whether they use UPI, ATM or cheques, the kinds of transactions they perform through UPI; do they find UPI better than using cash or not, and why.• if they or their acquaintance have experienced digital fraud, for instance, through a fake call or message asking for bank details. What did they do when they realised it was a scam, and what did they learn from that experience?Summarise your findings in a table or short report. Share one surprising insight with your class.

ANSWER This is an interview/activity, so answers will vary — record what your own family and neighbours say. A model summary table is given below; replace it with your real findings.
Question askedSample finding
How do they save money?Most save in a bank savings account and a fixed deposit; some use the post office (NSC, Sukanya Samriddhi) and a few keep some cash at home.
Do they use UPI, ATM or cheques?Almost all use UPI for small daily payments (vegetables, shops, recharges) and ATMs for cash; cheques are used mainly for big payments and bills.
Is UPI better than cash, and why?Most prefer UPI — it is instant, needs no change, keeps a record and is convenient. A few prefer cash where the internet is weak.
Any experience of digital fraud?One neighbour got a fake call asking for an OTP; they refused to share it, blocked the number and reported it on helpline 1930. Lesson learned: never share OTPs.
One surprising insight (example): even many elderly people now use UPI confidently, showing how quickly digital payments have spread in India. (Share your own real insight with the class.)

10. Create a Financial Safety Poster.

• Design a poster with dos and don’ts of digital banking safety (for example, not sharing OTPs, reporting frauds).• Include emergency numbers or websites like https://cybercrime.gov.in or 1930 helpline.• Hang the posters in school corridors or the library.

ANSWER This is a creative activity to be done by you. Make a colourful poster titled “Stay Safe with Digital Banking” and include the points below; then display it in your school corridor or library.
DOs ✔DON’Ts ✘
Use only official, trusted banking apps.Never share your OTP, PIN or password with anyone.
Keep your PIN and passwords secret and strong.Do not click unknown links or videos in messages.
Check your passbook / statement regularly.Do not store account passwords or card PINs on your phone.
Report fraud at once on helpline 1930 or cybercrime.gov.in.Do not give bank details to strangers on calls or messages.
Add bold colours, simple icons and the emergency number 1930 and website https://cybercrime.gov.in so they are easy to remember.

11. Cheques are often used to pay utility bills. Ask your parents to allow you to fill out the cheques for a few monthly payments.

ANSWER This is a practical activity to do at home with your parents’ permission. When filling out a cheque, write carefully: the date, the name of the person/company you wish to pay, the amount in words and the same amount in numbers, and then the signature of the cheque issuer (account holder). Cross out any blank space so the amount cannot be changed. For example, to pay an electricity bill of ₹1,500, write the bill date, the electricity company’s name, “Rupees one thousand five hundred only” in words, “1,500” in numbers, and ask your parent to sign. This helps you understand how a cheque transfers money from one bank account to another.

12. Suppose you have to withdraw ₹10,000 from your bank account, how would you fill out the cash withdrawal slip at your bank? Let us try below!

ANSWER A cash withdrawal slip (see Fig. 8.24 in the textbook) is filled at the bank to take cash from your own account. To withdraw ₹10,000 you would write:
Field on the slipWhat to write
DateThe day you are withdrawing the money.
Account numberYour own bank account number.
Account holder’s nameYour full name as in the bank records.
Amount in words“Rupees ten thousand only.”
Amount in figures₹10,000.
SignatureYour signature, matching the one on record.
You then submit the slip at the cash counter and receive ₹10,000 in cash. (Fill the actual slip given in your textbook for practice.)

Extra Practice Questions

Short Answer Type Questions

Q1. What is a bank?

ANSWERA bank is a financial institution that collects money from people in the form of deposits and lends money to people or borrowers as loans. It keeps people’s money safe, pays interest on savings, and charges interest on loans, making monetary transactions easy.

Q2. Name the three types of bank accounts and state who mainly uses each.

ANSWERThe three types are: (i) the savings account, for individuals who save regularly and earn interest; (ii) the current account, for businesses and traders who make and receive frequent payments; and (iii) the fixed deposit account, a one-time deposit kept for a fixed period that earns higher interest.

Q3. How do banks earn income from deposits and loans?

ANSWERBanks pay a lower rate of interest to depositors on their savings and charge a higher rate of interest from borrowers on loans. This difference between the two interest rates is the bank’s income. For example, if it pays 2% to a depositor and charges 5% from a borrower on ₹200, it earns ₹6.

Q4. What was the Pradhan Mantri Jan Dhan Yojana and why was it important?

ANSWERThe Pradhan Mantri Jan Dhan Yojana, launched in 2014, aimed to give every Indian, especially low-income earners, a bank account without requiring a minimum balance or fees. Over 50 crore accounts have since been opened, mainly by women, helping bring banking to all and enabling direct transfer of wages, scholarships and benefits.

Q5. What is UPI and why has it become popular?

ANSWERUPI (Unified Payments Interface) is a fast, secure digital payment system launched by the NPCI in 2016. It allows quick money transfers using a QR code or the recipient’s phone number. It is popular because it is instant, convenient, available in many languages, and gained wide use during the COVID-19 pandemic for cashless transactions.

Long Answer Type Questions

Q1. Explain how compounding makes money grow, using an example.

ANSWERCompounding is the process of earning interest not only on the original amount but also on the interest already earned in previous years. Suppose you deposit ₹1000 in a bank that pays 6% interest a year. At the end of the first year you earn 6% of ₹1000 = ₹60, so you have ₹1060. In the second year, interest is calculated on ₹1060, not just ₹1000, giving 6% of 1060 = ₹63.60, so your total becomes ₹1123.60. The interest earned keeps rising each year, and after 12 years ₹1000 grows to about ₹2012.20. The chapter’s story of the king and the sage — where one grain of rice doubled on each of the 64 chessboard squares grew into a huge amount — shows the same idea: through compounding, small amounts can grow into very large sums over time.

Q2. Describe the role of the Reserve Bank of India in the country’s banking system.

ANSWERThe Reserve Bank of India (RBI) is India’s central bank and the bank that supervises the entire Indian banking system. It was established in 1935 and, after Independence, was transferred to the Government of India; it has functioned as the banker of banks since 1949. The RBI maintains the accounts of other banks and facilitates the exchange of funds between them, and it provides loans to banks and to the government. It also sets the rules and regulations of banking — it has the sole right of printing and distributing Indian currency like banknotes, and it fixes the benchmark interest rates at which it lends to commercial banks. Because of these powers, the RBI is sometimes compared to Kubera, the god of wealth. In short, the RBI keeps the banking system orderly, stable and trustworthy.

Q3. What is the stock market? Explain shares, the stock exchange, and why share prices rise and fall.

ANSWERThe stock market is where people buy and sell shares of companies. A share is a part-ownership in a company; when you buy a share, you become a part-owner, and the more shares you own, the greater your ownership. A collection of shares is called a stock. Buying shares lets individuals invest their savings hoping their value will rise, while issuing shares helps companies raise funds for their operations. The actual buying and selling takes place at a stock exchange — in India, the Bombay Stock Exchange (BSE), set up in 1875, is one of the oldest in the world; trading that was once done with paper tickets is now digital. Share prices rise and fall due to many factors: if a company is doing well and is expected to earn money, its shares become more valuable; but problems like a bad product, a workers’ strike or a big loss reduce demand and the price drops. Government policy changes, new tax rules, political instability, wars and economic shocks can also cause prices to fluctuate. When many companies’ shares fall together it is a stock market crash; when they rise together it is a boom.

MCQs & Assertion–Reason

1. A bank is a financial institution that:

(a) only keeps money in lockers    (b) collects deposits from people and lends money as loans    (c) prints currency notes    (d) sells goods to customers

2. Which account is mainly meant for businesses and traders who make frequent payments?

(a) Savings account    (b) Fixed deposit account    (c) Current account    (d) Loan account

3. Earning interest on previously earned interest is called:

(a) borrowing    (b) compounding    (c) discounting    (d) crediting

4. Banks make money mainly because they:

(a) pay higher interest to depositors than they charge borrowers    (b) charge higher interest from borrowers than they pay depositors    (c) do not pay any interest    (d) keep all deposits in cash

5. The central bank of India, also called the banker to banks, is the:

(a) State Bank of India    (b) Bombay Stock Exchange    (c) Reserve Bank of India    (d) NABARD

6. The Pradhan Mantri Jan Dhan Yojana was launched in the year:

(a) 1949    (b) 2014    (c) 2016    (d) 2022

7. UPI was launched by the National Payments Corporation of India (NPCI) in:

(a) 2014    (b) 2015    (c) 2016    (d) 2020

8. A unit of ownership in a company is called a:

(a) loan    (b) deposit    (c) share    (d) cheque

9. The Bombay Stock Exchange (BSE), one of the oldest in the world, was established in:

(a) 1875    (b) 1935    (c) 1949    (d) 2016

10. In case of digital payment fraud, one should report it on the helpline number:

(a) 100    (b) 108    (c) 1930    (d) 1800

Answer key: 1-(b), 2-(c), 3-(b), 4-(b), 5-(c), 6-(b), 7-(c), 8-(c), 9-(a), 10-(c).

For each Assertion–Reason question, choose: (A) Both true and the Reason correctly explains the Assertion; (B) Both true but the Reason is not the correct explanation; (C) Assertion true, Reason false; (D) Assertion false, Reason true.

A-R 1. Assertion: Banks pay interest to people who deposit money in savings accounts.

Reason: Banks lend the deposited money to borrowers and earn interest, so they share some of it with depositors and encourage saving.

A-R 2. Assertion: A fixed deposit usually earns a higher rate of interest than a savings account.

Reason: Money in a fixed deposit stays with the bank for a fixed, longer period, giving the bank greater certainty to lend it.

A-R 3. Assertion: The Reserve Bank of India can issue currency notes.

Reason: The RBI is the central bank of India with the sole right to print and distribute Indian currency.

A-R 4. Assertion: One should freely share OTPs and PINs with callers who claim to be from the bank.

Reason: Sharing OTPs and PINs allows fraudsters to access accounts and steal money.

A-R 5. Assertion: UPI has made digital money transfers quick and convenient in India.

Reason: UPI allows instant transfers using a QR code or phone number without filling out a cheque each time.

Answer key: 1-(A), 2-(A), 3-(A), 4-(D), 5-(A).

Exam Tips & Common Mistakes

How to score full marks in this chapter

Learn the clear definitions of financial infrastructure, bank, deposit, loan, interest and compounding. For the numerical question, show every year’s calculation step by step (Year 1, Year 2, Year 3) and remember that interest is charged on the new total each year. Know the three account types and who uses each, the RBI’s functions (banker to banks, prints currency, fixes benchmark rates), key years (RBI 1935/1949, BSE 1875, Jan Dhan 2014, UPI 2016), and the safety rules against fraud (never share OTP/PIN; report on 1930). Use the textbook’s own examples — Navdeep and Rima, Anand and Shreya, the king-and-sage rice story, Kumar and Piyush’s UPI payment — to show you have studied the chapter.

Common mistakes to avoid

  • Calculating compound interest on the original amount each year — it must be calculated on the new total (interest on interest).
  • Confusing a savings account (earns interest, withdrawal limits) with a current account (no interest, for businesses).
  • Mixing up debit (money taken out) with credit (money received).
  • Thinking the RBI is an ordinary bank for the public — it is the central bank, the banker to banks.
  • Confusing a share (part-ownership in a company) with a loan (borrowed money to be repaid with interest).
  • Leaving the activity/interview questions (Q9–Q12) blank — write your own real findings and steps.

Frequently Asked Questions

What is Chapter 20 of Class 7 Social Science Exploring Society about?

Chapter 20, Banks and the Magic of Finance, explains financial infrastructure, what banks do, how interest and compounding make savings grow, the role of the Reserve Bank of India, modern payment systems like UPI, the stock market and shares, and how to stay safe from financial fraud.

How much will Sahil have after 3 years on ₹10,000 at 12% interest?

Using yearly compounding: after Year 1 it is ₹11,200, after Year 2 it is ₹12,544, and after Year 3 it is ₹14,049.28 (about ₹14,049). The interest is calculated on the new total each year, so it grows faster over time.

What is the exercise heading for Chapter 20 of Exploring Society Part 2?

The end-of-chapter exercise in Exploring Society: India and Beyond (Part 2) Chapter 20 is headed Questions and activities and contains 12 numbered questions and activities, all answered on this page.

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