Revision Notes for Class 10 Economics – Chapter 3 Money and Credit

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Money is called a medium of exchange as it acts as an intermediate in the exchange process. A person holding money can easily exchange it for any commodity or service that he or she might want.
Due to its role as an intermediate in transactions, forms and essence of money has changed over time, from grain and cattle being used for transactions in ancient periods to coins later on to further modern forms of money today.
The main function of Money is to eliminate the need for double coincidence of wants.

Double Coincidence of Wants

● In the barter system, a shortcoming is that an exchange can only take place, if both parties want exactly the same thing that the other party has to offer at the same time.
● Both the parties have to agree to sell and buy each other’s commodities. This is known as double coincidence of wants.

Modern forms of Money

  • Currency:
    • Modern forms of money include currency – paper notes and coins.
    • Today, currency is not made of precious metals but still accepted as a medium of exchange, as it is authorised by the government.
    • In India, only the Reserve Bank of India issues currency notes on behalf of the central government.
    • No individual in India can legally refuse a payment made in rupees.
  • Deposits with Banks:
    • The other form in which people hold money is as deposits with banks.
    • Excess money after fulfilling day to day needs is deposited with the banks by opening a bank account.
    • Deposits in the bank account which can be withdrawn on demand are called demand deposits.
    • Banks also offer the facility of payments being made by cheques instead of cash.

Cheque: A cheque is a paper instructing the bank to pay a specific amount from the person’s account to the person in whose name the cheque has been issued.

Loan Activities of Banks:

  • Banks use the major portion of the deposits to extend loans for various economic activities.
  • In this way, banks mediate between those who have surplus funds (the depositors) and those who are in need of these funds (the borrowers).
  • Banks charge a higher interest rate on loans than what they offer on deposits.
  • The difference between what is charged from borrowers and what is paid to depositors is the main source of income for banks.

Credit Situations

  • 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.
  • Purpose of credit are:
    • To meet the working capital needs of production.
    • To meet the ongoing expenses of production, complete production on time, and thereby increase his earnings.
    • To fulfil the demand for credit in rural areas for crop production which involves considerable costs on seeds, fertilisers, pesticides, water, electricity, repair of equipment, etc.
  • On one hand, credit helps to increase the earnings while on other hand it may push the person into a debt trap (e.g., during crop failure).

Terms of Credit

  • Terms of credit is the loan agreement between the lender and the borrower. It may vary depending on the nature of the lender and the borrower.
  • Interest rate, collateral and documentation requirement, and the mode of repayment together comprise what is called the terms of credit.
  • For every loan granted, the lender demands collaterals (security) against loans.

Collaterals: Collateral is an asset that the borrower owns (such as land, building, vehicle, livestock, deposits with banks) and uses this as a guarantee to a lender unƟl the loan is repaid.

Loans from Cooperatives:

  • A cooperative is a farm, business, or other organization which is owned and run jointly by its members, who share the profits or benefits.
  • It is another major source of cheap credit in rural areas.
  • Members of a cooperative pool their resources for cooperation in certain areas. For example, farmers cooperatives, weavers’ cooperatives, industrial workers cooperatives, etc.
  • They generally accept deposits from its members.
  • With these deposits as collateral, the cooperatives obtain a large loan from the bank.
  • Then, these funds are used to provide loans to members. Once repaid, another round of lending can take place.

Formal Sector Credit in India

  • The various types of loans can be conveniently grouped as formal sector loans (loans from banks and cooperatives) and informal sector loans (including moneylenders, traders, employers, relatives and friends).
  • The RBI supervises the functioning of formal sources of loans.
  • Periodically, banks have to submit information to the RBI on how much they are lending, to whom, at what interest rate, etc.
  • Informal sources of credit are unsupervised and hence prone to usage of unfair terms of credit and means of recovery, which may cause the borrower hardships and often push him/her in debt trap.
  • Rich households both in urban and rural areas, avail a major portion of their credit from formal sources, which is opposite in case of relatively poor households.
  • The formal sector still meets only about half of the total credit needs of the rural people.
  • Banks and cooperatives need to expand in the rural areas to reduce the dependence upon informal sources and in the urban areas credit from these sources needs to be more equitably distributed even to the poor households.
  • Cheap and affordable credit from formal sources is necessary for the development of the country.

Self-Help Groups and the Poor

  • A self-help group (SHG) is an informal association of people who come together to find ways to improve their living conditions. They are generally self-governed and peer controlled.
  • It is basically a community where 15-20 members generally women, usually belonging to one neighbourhood meets and save regularly.
  • Members can take small loans from the group itself to meet their needs. The group charges interest on these loans but this is still less than what the moneylender charges.
  • The group as a whole decides the terms of credit for granting loans to the members.
  • If the group is regular in savings, it becomes eligible for availing loan from the bank.
  • Bank loan is sanctioned in the name of the group and is meant to create self-employment opportunities for the members.

Banks willingness to lend to the SHGs

As it is the group which is responsible for the repayment of the loan. Any case of non-repayment of loan by any one member is followed up seriously by other members in the group. Because of this feature, banks are willing to lend to the poor women when organised in SHGs, even though they have no collateral as such.

Merits of SHGs for the members

  • SHGs help borrowers to get loans without collateral.
  • Members can get timely loans for a variety of purposes and at a reasonable interest rate.
  • They are the building blocks of organisation of the rural poor.
  • It helps women to become financially self-reliant.
  • Regular meetings of the group provide a platform to discuss and act on a variety of social issues such as health, nutrition, domestic violence, etc.

Interesting Points

  • Working capital: It is the money required for running day to day operations of a business.
  • Debt trap: It is a situation when the borrower takes another loan to repay the previous loan.

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