CBSE
Notes Class 10 Economics Chapter 3 – Money and Credit
Money as a Medium of Exchange
Money acts as an intermediate in the exchange process, it is
called a medium of exchange. A person holding money can easily exchange it for
any commodity or service that he or she might want.
Modern Forms of Money
In the early ages, Indians used grains and cattle as money.
Thereafter came the use of metallic coins – gold, silver, copper coins – a
phase which continued well into the last century. Now, the modern forms of
money include currency – paper notes and coins. The modern forms of money –
currency and deposits – are closely linked to the workings of the modern
banking system.
Currency
In India, the Reserve Bank of India issues currency notes on
behalf of the central government. No other individual or organisation is
allowed to issue currency. The rupee is widely accepted as a medium of exchange
in India.
Deposits in Banks
The other form in which people hold money is as deposits
with banks. People deposit their extra cash with the banks by opening a bank
account in their name. Banks accept the deposits and also pay an amount as
interest on the deposits.
The deposits in the bank accounts can be withdrawn on
demand, these deposits are called demand deposits. The payments are
made by cheque instead of cash.
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 keep only a small proportion of their deposits as cash
with themselves. These days banks in India hold about 15% of their deposits as
cash. This is kept as a provision to pay the depositors who might come to
withdraw money from the bank on any given day. Banks use the major portion of
the deposits to extend loans. There is a huge demand for loans for various
economic activities. Banks charge a higher interest rate on loans than what
they offer on deposits. The difference between what is charged by borrowers and
what is paid to depositors is their main source of income for banks.
Two Different 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.
Here are two examples which help you to understand how
credit works.
Festive Season:
In this case, Salim obtains credit to meet the working
capital needs of production. The credit helps him to meet the ongoing expenses
of production, complete production on time, and thereby increase his earnings.
In this situation, credit helps to increase earnings, and therefore, the person
is better off than before.
Swapna’s Problem:
In Swapna’s case, the failure of the crop made loan
repayment impossible. She had to sell part of the land to repay the loan.
Credit, instead of helping Swapna improve her earnings, left her worse off.
This is an example of debt-trap. Credit, in this case, pushes the
borrower into a situation from which recovery is very painful. Whether credit
would be useful or not depends on the risks in the situation and whether there
is some support in case of loss.
Terms of Credit
Every loan agreement specifies an interest rate that the
borrower must pay to the lender along with the repayment of the principal. In
addition, lenders also demand collateral (security) against loans.
Collateral (Security) 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 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.
Interest rate, collateral and documentation requirement and
the mode of repayment, together, are called the terms of credit. It
may vary depending on the nature of the lender and the borrower.
Formal Sector Credit in India
Cheap and affordable credit is crucial for the country’s
development. The various types of loans can be grouped as follows:
Formal sector loans:
These are the loans from banks and cooperatives. The Reserve
Bank of India supervises the functioning of formal sources of loans. Banks have
to submit information to the RBI on how much they are lending, to whom, at what
interest rate, etc.
Informal sector loans:
These are the loans from moneylenders, traders, employers,
relatives and friends, etc. There is no organisation which supervises the
credit activities of lenders in the informal sector. There is no one to stop
them from using unfair means to get their money back.
Formal and Informal Credit
The formal sector meets only about half of the total credit
needs of rural people. The remaining credit needs are met from informal
sources. It is important that formal credit is distributed more equally so that
the poor can benefit from cheaper loans.
- It
is necessary that banks and cooperatives increase their lending,
particularly in rural areas, so that the dependence on informal sources of
credit reduces.
- While
the formal sector loans need to expand, it is also necessary that everyone
receives these loans.
Self Help Groups for the Poor
Poor households are still dependent on informal sources of
credit because of the following reasons:
- Banks
are not present everywhere in rural India.
- Even
if banks are present, getting a loan from a bank is much more difficult as
it requires proper documents and collateral.
To overcome these problems, people created Self Help Groups
(SHGs). SHGs are small groups of poor people who promote small savings among
their members. A typical SHG has 15-20 members, usually belonging to one
neighbourhood, who meet and save regularly.
Advantages of Self Help Groups (SHG)
- It
helps borrowers to overcome the problem of lack of collateral.
- People
can get timely loans for a variety of purposes and at a reasonable
interest rate.
- SHGs
are the building blocks of the organisation of the rural poor.
- It
helps women to become financially self-reliant.
- The
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.
