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Money and Credit
In the early times, people used to exchange one commodity for another, depending on their requirement under the Barter System. However, exchanging goods in the barter system required a double coincidence of wants.
Money and Credit Mind Map
Money as a Medium of Exchange
Money is used for several transactions. It is considered as a means of exchange, as it acts as intermediate in the exchange process.
Barter System of Exchange
Before the use of money, people followed barter system of exchange. In this system, goods are directly exchanged (without use of money) between two or more people who agree to exchange each other’s goods.
For example, farmer exchanging wheat for shoes and vice versa. In this case, the farmer and shoes manufacturer should be in need of each other’s goods. This is called double coincidence of wants.
The major drawback of this system was the lack of double coincidence of wants, as without it, exchange was not possible. The use of money eliminated the need of double coincidence of wants. Money was accepted as a common medium of exchange.
Modern Forms of Money
Modern forms of money include currency (paper notes and coins). Before the introduction of coins, a variety of objects like grains and cattle were used as money. Further, the use of metallic coins of gold, silver, copper, etc started.
Currency
It is a generally accepted form of money, that includes coins and paper notes. It is authorised by the government and circulated within an economy. The modern currency has no use of its own except as a medium of exchange.
In India, Reserve Bank of India can only issue currency notes on behalf of the Government of India. The rupee is widely accepted as a medium of exchange as it is legalised by law.
Deposits with Banks
It means the amount that people keep in their bank accounts. People deposit their extra money in banks by opening a bank account in their name. The money in bank account are deposits with banks. Banks accept the deposits and also pay an interest on the deposits. People can also withdraw the money when they require. Deposit with banks are called Demand Deposits.
Cheque Facility
Cheque is basically a paper instructing the bank to pay a specific amount from the person’s account to that person in whose name the cheque has been issued. Payments can be made with the use of cheque instead of cash.
Modern Banking System
The modern forms of money i.e. currency and deposits are closely linked to the working of the modern banking system.
Loan Activities of Banks
Banks accept deposits of the people. In this way, they collect large amount as deposits. They keep only a small portion of deposits (in India, it is 15%) as cash.
This is kept for those depositors who wish to withdraw money from their accounts. Rest of the deposits are given as loans by the banks.
When banks give loans, they charge higher rate of interest from the people who have taken loans. This becomes the income of the banks. In this way, banks act as mediator between those who have surplus funds (the depositors) and those who are in need of funds (the borrowers).
Credit
Credit or loan refers to an agreement in which the lender supplies money, goods or services to borrower with the promise of future payment. A large number of transactions in our day-to-day activities involve credit in some form or the other.
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Two Different Credit Situations
(i) In the first situation, credit is used to meet the production expenses. When the production is complete then it increases earnings. Here, credit plays a positive role.
For example, Salim a manufacturer takes credit for his business. During the festival season, he receive large orders from traders. To complete production on time, he ask the raw material suppliers to supply material on credit. He also obtains loan in cash from the trader as some of the advance payment for the goods to be supplied.
At the end of the manufacturing cycle, Salim is able to deliver the order, make a good profit and repay the money that he had borrowed. This helps to increase earnings and therefore, the person is better off than before.
(ii) In the second situation, credit pushes the borrower into a situation from which recovery is very difficult and painful.
For example, Swapna takes loan from moneylender to grow groundnut, hoping that her harvest would help repay the loan.
Midway through the season the crop is hit by pests and the crop fails. She is unable to repay the moneylender and the debt grows over the year into a large amount.
Next year, Swapna takes a fresh loan for cultivation. It is a normal crop this year but the earnings are not enough to cover the old loan. She is caught in debt. She has to sell a part of the land to pay off the debt.
In this situation, credit pushes Swapna into a debt-trap. Her condition becomes worse than before.
Interpretation of Both Situations
- From both the examples, we see that in one situation credit helps to increase earnings and therefore, the condition of a person is better than before.
- In other situation, because of the crop failure credit pushes the person into a debt-trap. Whether credit would be useful or not, it depends on the risks in the situation and whether there is some support, in case of loss.
Terms of Credit
It is a set of conditions under which a loan is given. It may include method of payment, rate of interest, duration of credit and other related conditions like, collateral,
documentation requirement and the mode of repayment. The terms of credit may vary according to the situation of the lender and the borrower.
Collateral
It is a security against loans. It is an asset that the borrower owns and uses this as a guarantee to a lender until the loan is repaid. If the borrower fails to repay the loan, the lender has the right to sell the asset or collateral to obtain payment.
Some examples of collateral security used for borrowing are land titles, deposits with banks, livestock, etc.
Variety of Credit Arrangements
There may be different credit arrangements for different categories of borrowers. These are
- Loan from Moneylenders Small farmers borrow money from the village moneylender at high rate of interest. Due to high interest rate they fell in debt-trap.
- Loan from Traders Farmers get loans from agricultural traders at a lower rate of interest. But the traders also get the promise of the farmers to sell their crops to him only. In this way, trader ensures that the money is repaid besides making profit. He buys crop from farmers at low price and sell it later, when price is high.
- Loan from Banks Some farmers take loan for cultivation from banks, at very low interest rate and at easy repayment terms. Banks also provide other facilities to such borrowers.
- Loan from Employers Landless agricultural labourers and workers depend on their employers for loan. The landowner may charge interest rate upto 5% per month. The workers work for landowners in order to repay the loan.
- Loan from Cooperatives This is the major source of cheap credit in rural areas. Loans to member of cooperative societies can be provided for the purchase of agricultural implements, cultivation and agricultural trade, fisheries, construction of houses and other expenses.
Credit Sources in India
The two categories of sources of credit are formal sector credit or loans and informal sector credit or loans.
The formal sector comprises banks and cooperative societies. The informal sector may consist of moneylenders, friends and relatives, traders, landowners, large farmers, etc.
Features of Formal Sector Credit
- It provides loans comparatively at a lower rate of interest and collateral security is required to obtain loans.
- This sector is mainly supervised by the RBI (Reserve Bank of India).
- It includes banks and cooperatives.
Role of RBI in Formal Sector
RBI has major role in providing formal sector credit. Its role is
- The RBI (Reserve Bank of India) ensures that the banks give loans not just to profit-making businesses and traders, but also to small cultivators, small scale industries, small borrowers, etc.
- Periodically, banks have to submit information to the RBI on how much they are lending, to whom and at what interest rate they are lending to borrowers, etc.
- The banks maintain a minimum cash balance out of the deposits they receive. The RBI monitors the banks in actually maintaining cash balance.
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Features of Informal Sector Credit
- This sector charges higher interest rates on the loans that are given as there is no organisation to supervise this sector.
- This sector could lead to increasing debt as the borrower finds difficulty in paying back.
- People who might wish to start an enterprise by borrowing from the informal sector may not do so because of the high cost of borrowing. However, still poor households in urban and rural areas depend upon informal sources for their borrowing needs as they don’t require any collateral.
Self Help Groups (SHGs) for the Poor
Self Help Group is a group of people usually belonging to one neighbourhood having same social and economic backgrounds. They meet and save money regularly as per their ability.
Members of the group (usually 15-20) can take small loans from the group itself to meet their needs. The group charges interest less than moneylenders on these loans.
After one or two years, if the group is regular in savings, it becomes eligible for availing loan from the bank. Loan is sanctioned in the name of group and is meant to create self-employment opportunities by providing money to buy raw materials, seeds, assets like sewing machines, handlooms, cattle, etc.
SHGs : A Helping Hand for Women
SHGs are the building blocks of organisation of the rural poor. The SHGs help women to become financially self-reliant and regular meetings of the group provide a platform for women to discuss and act on a variety of social issues such as health, nutrition, domestic violence, etc.
Grameen Bank of Bangladesh
Professor Muhammad Yunus, the founder of Grameen Bank and recipient of 2006 Nobel Prize for Peace, started the bank as a small project in the 1970s. He provided small credit on reasonable terms and conditions to millions of poor people with different occupations.
Money And Credit Quick Revision Notes
Money and Credit
Introduction
In the early times, people used to exchange one commodity for another, depending on their requirement under the Barter System. However, exchanging goods in the barter system required a double coincidence of wants.
- Barter system was used in ancient times for the exchange goods. It was a system where one commodity, product or some goods was exchanged for another. For instance, if a person has 1 kg of sugar and he wants to have 1 kg of jaggery in exchange for that, he can exchange the same if there is someone who is willing to exchange jaggery for sugar. This process was called a commodity for commodity exchange.
However, money eliminates the need for double coincidence of wants. Since money enables
the exchange process, it is also called a medium of exchange.
- Limitations of Barter Exchange:
- Lack of Double Coincidence of Wants
- Lack of Common Measure of Value
- Lack of Standard of Deferred Payment
- Lack of store of value
Money is anything which is commonly accepted as a medium of exchange and in the discharge of debts.
Before the introduction of coins, a variety of objects were used as money. For example, since the very early ages, Indians used grains and cattle as money. Thereafter, came the use of metallic coins–gold, silver, copper coins.
- Modern currency:
- Modern forms of money include
- currency — paper notes and coins.
- money is as deposits with banks.
- The other forms is which people hold.
- In India, the Reserve Bank of India is the only legal authority that can issue currency notes and coins on behalf of the Central Government. The rupee is India’s currency and nobody can refuse to accept a payment made in rupees in India.
- People deposit their additional cash in the bank. A bank in addition to accepting deposits, also pays interest on the deposit to the depositor. Thus, bank deposits are also called demand deposits.
- A person simply needs to have an account with the bank to deposit money. A cheque can be used to make payment directly from a bank deposit without using cash.
- A cheque is a written instruction to a bank by an account holder to pay a specific sum to a specific person from his deposit.
- A cheque has all the information about the person to whom payment is to be made, the amount and date of payment and the signature of account holder issuing the cheque.
Credit Terms and Types
As per the Reserve Bank of India, banks hold about 15% of their deposits as cash to arrange
for daily withdrawals by depositors.
A major portion of the remaining deposits is used by banks to give loans to people. The
depositors of a bank are allowed to withdraw their deposits on demand and are paid interest
on their deposits. The borrowers take loans to repay it to the bank along with interest.
The interest charged on loans is more than the interest paid by the banks on deposits. The
difference between the interest charged on loans and the interest paid on deposits is the
bank’s income or profit.
The loan given by a bank is also referred to as credit.
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.
The idea behind Self-Help Groups is to organize the rural poor into self-help groups and collect their savings.
Members can take small loans from the group itself to meet their own needs.
A typical SHG has 15-20 members who meet and save regularly. Saving per member varies from Rs 25 to Rs 100
or more, depending on the ability of the people to save.
- A loan or credit is subject to certain conditions that the borrower must agree to. These conditions are called terms of credit and include:
- A specified rate of interest.
- Security against the loan to recover the money if the borrower fails to repay it. This security is called collateral.
- The assets accepted as collateral are land or property, vehicles, livestock, standing crops and bank deposits.
- A borrower needs to submit certain documents like proofs of identity, residence, employment and income to avail a loan.
- The lender reserves the right to sell the collateral in case of non-repayment to recover the loan amount.
Collateral is an asset that the borrower owns (such as land, building, vehicles, livestock, etc.) and uses this as a
guarantee to the lender until the loan is repaid.
- Interest rate, collateral and documentation requirement, and the mode of repayment together comprise what is called the terms of credit.
The different sources of credit are:
- Banks
- Traders
- Cooperative societies
- Landlords
- Moneylenders
- Relatives and friends
- Formal and Informal Credit
- Formal credit is generally available with banks and cooperatives. They charge lesser rates of interest than informal institutions. The Reserve Bank of India (RBI) supervises the functioning of the formal sources of loans.
- Informal lenders include moneylenders, traders, employers, relatives, and friends, etc. They charge much higher interest on loans. There is no one to stop them from using unfair means to get their money back.
Money And Credit Important terms
Barter System: Barter refers to the direct exchange of goods and services. In this way, the barter system refers to the system by which one commodity is exchanged for another without the use of money.
Money: Money may be anything chosen by common consent as a medium of exchange. It can be in the form of
coins and banknotes collectively.
Cheque: A cheque is a paper instructing the banks in writing to pay a specific amount from the person’s account to the person in whose name the cheque has been issued.
Reserve Bank of India: The Reserve Bank of India is the only legal authority that can issue currency notes and
coins on behalf of the central government.
Investment: Investment is the amount of money spent with the intention of earning income at regular intervals
(in the form of return from funds invested) or in the long run (in the form of capital appreciation).
Credit: Credit means giving money on a loan to needy persons.
Financial Formal Institutions: Commercial banks, cooperatives, and regional rural banks are the formal
institutions of credit.
Financial Informal Institutions: The informal framework for the deployment of credit and savings in India
comprises the local moneylenders, landlords, self-help groups, chit fund, employers, relatives, friends and
private finance companies.
Commercial Bank: A commercial bank is an establishment for the safe custody of money, which it pays out on
a customer’s demand order or otherwise. In other words, institutions accepting deposits and issuing loans are
called commercial banks.
Loans: A loan is usually given for a specific duration of time and needs to be completely repaid by a specified date.
Collateral: Collateral is the security provided by a borrower (such as land, building, vehicle, livestock, or deposits
with banks) against a loan, and it can be sold in case of non-payment of loan.
Fixed Deposits: These are deposits for a fixed term varying from a frequency of a few days to a few years.
Actual Investment: The actual amount of investment is called an actual investment.
Deferred Payments: Payments that are to be made in the future are known as deferred payments.
Token coins: Token coins are the coins where value as money is far above the value of the metal contained in it.
Short-term loans: Loans given for a short period of time are known as short-term loans.
Money and Credit Class 10 Pdf
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