Chapter - 3 Money and Credit
Money as a Medium of Exchange:- Money acts as an intermediate in the exchange process.
Barter system: Before money, goods were exchanged for other goods (e.g., wheat for rice).
Double coincidence of wants: Both parties must want what the other offers.Seller and Buyer agree to buy and purchase.
Why Money?
- Medium of exchange: Eliminates the need for double coincidence.
- Measure of value: Standard for pricing goods/services.
- Store of value: Can be saved for future use.
- Standard of deferred payments: Useful in lending/borrowing.
2. Modern Forms of Money
- Earlier: Coins and paper currency.
- Now: Currency + Deposits in banks (cheques, debit cards, online transfers).
What is a Demand Deposit?
- A demand deposit is the money that you deposit in a bank account, which you can withdraw anytime on demand, without any prior notice.
Key Features of Demand Deposits:
- They are accessible anytime through cheques, ATMs, or online banking.
- They are a safe place to keep money.
- They are part of modern money (along with currency).
- They help in easy payments through cheques or transfers.
Example:
You have ₹5,000 in your savings account at a bank. That money is a demand deposit—you can go to the ATM or use online banking to withdraw it or transfer it whenever you want.
What is 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.
Important Point:
- Only RBI (Reserve Bank of India) issues currency notes in India.
- Currency is legal tender—everyone must accept it in payment.
Loan activities of bank
Credit (Loans)
Definition: An agreement in which the lender provides money/resources and the borrower agrees to repay later, usually with interest.
Types of Credit: There are two kind of credit
1. Formal Sector: -
- Banks and cooperatives. :- Bank mediaate between those who have surplus funds (Depositors) and those who are in need of these funds (Borrowers).
- Regulated by RBI:- Activities of Bank and cooperative regulate by RBI and all banks must report to RBI
- Require documentation and collateral.
- Lower interest rates:- Due to lower interest rate and regulatory body help borrower to grow or less chance to be exploite.
- To promote small businessman, trader, peasant etc.
- Cheap and affordable credit is crucial for the country's development.
Informal Sector: A person(borrower) take credit unregulatory body like.
- Moneylenders, traders, relatives.
- Not regulated.
- High interest rates.
- Risk of exploitation.
- They can use unethical means to get their money back.
Terms of Credit:- Every loan agreement have specifies certain conditions or terms like.
- Interest rate
- Collateral (e.g., land, gold):- It is an asset that the borrower owns land, building, vehicle, livestocks, deposit with bank, use this as a guarntee to a lender until the loan is repaid.
- Mode of repayment
- Time period
Two Sides of Credit
- Positive: Can help increase income and investment (e.g., a farmer borrowing to buy seeds and earning profits).
- Negative: Can lead to debt trap if not repaid on time (e.g., crop failure leading to inability to repay loan).
Debt Trap – A debt trap is a situation where a person takes a loan but is unable to repay it, so they are forced to take more loans to repay the previous ones, leading to a cycle of increasing debt.
Example:- A farmer takes a loan to buy seeds, but his crop fails. He can't repay the loan, so he borrows again. Now he has two loans and interest to pay—this can lead to a debt trap.
Why Do People Prefer Informal Credit Over Formal Credit?
Even though formal credit (like from banks) is safer and cheaper, many people—especially in rural areas—still prefer informal credit.
1. Easy to Get
- No need for documents, ID proofs, or credit history.
- Informal lenders (like moneylenders, relatives) are more flexible.
2. Quick Process
- Loans are given immediately, often in cash.
- No long paperwork or approval delays like in banks.
3. No Collateral Required
- Formal loans usually need collateral (like land or gold).
- Informal lenders often give money without demanding any security.
4. Personal Relationship
- Informal credit is often based on trust and personal relations.
- It may come from someone they know—like a local shopkeeper or friend.
5. Lack of Access to Banks
- In some villages or poor areas, people don’t have banks nearby.
- They may not even have bank accounts or know how to apply for a loan.
Self Help Groups (SHGs)
A Self Help Group (SHG) is a small group of people, usually 10 to 20 members, who come together to save money regularly, give small loans to each other, and support each other financially and socially.
Main Objective of SHG:-To provide small loans, encourage saving habits, and empower poor people, especially women, by making them financially independent and self-reliant.
Functions of SHG:
- Promotes Regular Savings:- Every member saves a fixed small amount regularly (e.g., ₹50 or ₹100).
- Provides Loans to Members:-Members can borrow small amounts for needs like medical help, farming, small businesses, etc.
- Loans are given at low interest rates.
- Access to Bank Loans:- SHG can take bigger loans from banks in the group’s name, without individual collateral.
- Financial Literacy:-Teaches members how to manage money, budgeting, and simple accounting.
- Social Empowerment:-Builds confidence, unity, and helps in solving local problems (like drinking water, education, etc.)
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