3:
Money and Credit
1. Money as a Medium of Exchange
Meaning of Money
Money is anything that is
generally accepted as payment for goods and services.
Money makes transactions easy
because people can exchange money for whatever they need.
Problem Before Money: Barter System
Barter System: Direct exchange of goods and
services without using money.
Example:
- A shoe maker wants wheat.
- A farmer has wheat but wants clothes.
- A cloth maker wants shoes.
Exchange becomes difficult.
Double Coincidence of Wants
This means:
Both parties must agree to buy
and sell each other's goods at the same time.
Example:
- Shoe maker wants wheat.
- Farmer must also want shoes.
Only then exchange can happen.
Limitation of Barter System
- Difficult to find matching needs.
- Time-consuming.
- Not suitable for large economies.
Role of Money
Money removes the need for
double coincidence of wants.
Example:
- Shoe maker sells shoes for money.
- Uses money to buy wheat.
Thus money acts as:
Medium of Exchange
Money serves as an
intermediate in transactions.
Key Point for Exam:
Money eliminates the problem of double coincidence of wants.
2. Evolution of Money
Ancient Forms of Money
Before coins and currency,
people used:
- Grains
- Cattle
- Shells
- Salt
Metallic Money
Later people used:
- Gold coins
- Silver coins
- Copper coins
Examples from textbook:
- Punch-marked coins
- Gupta coins
- Akbar's Gold Mohar
- Tughlaq coins
3. Modern Forms of Money
Modern money consists of:
A. Currency
Includes:
- Coins
- Paper notes
Why Is Currency Accepted?
Because it is authorized by
the government.
Legal Tender
Money that cannot legally be
refused as payment.
In India:
- Rupee is legal tender.
- Every person must accept payment in rupees.
Role of RBI
The Reserve Bank of India
issues currency notes on behalf of the Government of India.
Extra Fact
The promise written on Indian
currency notes:
"I promise to pay the
bearer the sum of..."
This guarantee is given by
RBI.
4. Deposits with Banks
People do not keep all money
as cash.
They deposit extra money in
banks.
Benefits
- Safety
- Interest earnings
- Easy withdrawal
Demand Deposits
Deposits that can be withdrawn
anytime on demand.
Examples:
- Savings account
- Current account
Why Are Demand Deposits Money?
Because they can be used
directly for payments.
They have the same essential
feature as money.
5. Cheque System
Cheque
A written order to a bank to
pay a specified amount.
Example from Textbook
Salim writes a cheque to pay a
leather supplier.
The supplier deposits it in
his bank.
Money is transferred
electronically from one account to another.
No cash is used.
Importance
- Safe
- Convenient
- Reduces need for cash
6. Loan Activities of Banks
What Do Banks Do With Deposits?
Banks keep only a small
portion as cash.
The rest is lent to borrowers.
Banking Process
Depositors → Bank → Borrowers
How Banks Earn Profit
Banks:
- Pay lower interest on
deposits.
- Charge higher interest on
loans.
Difference = Bank's income.
Important Concept
Banks act as intermediaries
between:
- People with surplus money
- People needing money
Extra Fact
If all depositors withdraw
money at the same time:
- Banks may face a crisis.
- This is called a Bank
Run.
CREDIT
7. Meaning of Credit
Credit (Loan)
An agreement where:
- Lender gives
money/goods/services.
- Borrower promises future
repayment.
Parties
- Lender
- Borrower
8. Two Different Credit Situations
A. Salim's Case (Positive Credit)
Salim:
- Receives a large order.
- Needs money for
production.
- Takes loans.
Result:
- Produces shoes.
- Earns profit.
- Repays loan.
Outcome
Credit increases income.
Positive Role of Credit
Credit:
- Supports production.
- Increases earnings.
- Promotes business growth.
B. Swapna's Case (Negative Credit)
Swapna:
- Small farmer.
- Takes loan for
cultivation.
Problem:
- Crop destroyed by pests.
Result:
- Cannot repay loan.
- Takes another loan.
- Debt increases.
Finally:
- Sells land.
Debt Trap
A situation where a borrower
continuously borrows to repay old loans.
Outcome
Credit worsens her condition.
Important Conclusion
Credit can:
- Improve income.
OR - Push people into debt.
Depends on:
- Risks involved
- Availability of support
during losses
9. Terms of Credit
Every loan has specific
conditions.
Components of Terms of Credit
A. Interest Rate
Extra money paid over
principal amount.
B. Collateral
Asset kept as security for
loan repayment.
Examples:
- Land
- Building
- Vehicle
- Livestock
- Bank deposits
C. Documentation
Proof required by lender.
Examples:
- Salary slips
- Identity proof
- Property documents
D. Mode of Repayment
How and when loan is repaid.
Examples:
- Monthly instalments
- Lump sum payment
10. House Loan Example (Megha)
Loan Details
- Loan amount = ₹5 lakh
- Interest = 12% per annum
- Duration = 10 years
- Repayment = Monthly
instalments
Collateral
House papers
Documents
Employment and salary records
VARIETY OF CREDIT ARRANGEMENTS
11. Credit Sources in Sonpur Village
Shyamal (Small Farmer)
Borrows from:
- Trader
- Moneylender
Interest:
- 3% per month from trader
- Earlier 5% per month from
moneylender
Problem:
- Must sell crop to trader.
Arun (Medium Farmer)
Borrows from bank.
Interest:
- 8.5% annually
Advantage:
- Low interest
- Better income
Rama (Landless Labourer)
Borrows from employer.
Interest:
- 5% per month
Problem:
- Debt keeps increasing.
- Exploitation by employer.
Sources of Credit in Sonpur
- Banks
- Traders
- Moneylenders
- Landowners
- Cooperatives
12. Cooperative Societies
Meaning
Groups formed by members who
pool resources.
Functions
Provide loans for:
- Farming
- Fisheries
- Trade
- Housing
- Equipment purchase
Advantages
- Lower interest
- Community support
- Easier access
FORMAL AND INFORMAL CREDIT
13. Formal Sources
Sources regulated by RBI.
Examples:
- Commercial banks
- Cooperative banks
Features
✔ Lower interest
✔ Legal procedures
✔ RBI supervision
✔ More secure
14. Informal Sources
Examples:
- Moneylenders
- Traders
- Employers
- Friends
- Relatives
Features
✔ Easy access
✔ Less paperwork
✘ High interest
✘ Exploitation possible
✘ No government supervision
Formal vs Informal Credit
|
Formal Credit |
Informal Credit |
|
Regulated by RBI |
Not regulated |
|
Lower interest |
Higher interest |
|
Safer |
Risky |
|
Documentation required |
Minimal documentation |
|
Legal protection |
No legal protection |
15. Role of RBI
Functions
RBI supervises banks by:
- Monitoring cash reserves
- Regulating lending
- Collecting information
from banks
- Ensuring fair banking
practices
Why Necessary?
Protects:
- Depositors
- Borrowers
- Banking system
16. Need for Cheap Credit
Cheap credit:
- Encourages production
- Creates employment
- Reduces poverty
- Prevents debt traps
- Promotes development
Major Problem
Poor people often depend on
expensive informal loans.
SELF HELP GROUPS (SHGs)
17. What Are SHGs?
Small groups of poor people,
mainly women, who:
- Save regularly
- Pool money
- Provide loans to members
Typical SHG
- 15–20 members
- Monthly savings
- Regular meetings
Benefits of SHGs
Financial Benefits
- Easy loans
- Low interest
- No collateral
Social Benefits
Women become:
- Financially independent
- Confident
- Organised
Groups discuss:
- Health
- Nutrition
- Domestic violence
- Education
Why Banks Support SHGs?
Because:
- Members monitor each
other.
- Repayment rates are high.
- Group responsibility
reduces risk.
DO YOU KNOW? (Important Extra Facts)
1. Demonetisation (2016)
The textbook notes mention:
In November 2016:
- ₹500 notes were demonetised.
- ₹1000 notes were demonetised.
People exchanged them for:
- New ₹500 notes
- ₹2000 notes
Purpose
- Reduce black money
- Promote digital payments
- Increase transparency
2. Digital Transactions
After demonetisation, digital
payments increased through:
- Internet banking
- Mobile banking
- Debit cards
- Credit cards
- POS machines
- QR codes
- UPI
3. Grameen Bank
Founded by:
Muhammad Yunus
Country:
Bangladesh
Achievement
- More than 9 million
members.
- Mostly poor women.
- Provides small loans at
reasonable rates.
Recognition
Muhammad Yunus received the:
Nobel Peace Prize 2006
Most Important Definitions
Money
Anything generally accepted as
a medium of exchange.
Double Coincidence of Wants
A situation where two persons
mutually need each other's goods.
Demand Deposits
Deposits withdrawable anytime
on demand.
Credit
An agreement where a borrower
receives money today and repays later.
Collateral
An asset pledged as security
against a loan.
Debt Trap
A situation where repayment of
loans becomes difficult and debts keep increasing.
SHG
A small group of people who
save regularly and provide loans to members.
Formal Credit
Credit from banks and
cooperatives regulated by RBI.
Informal Credit
Credit from moneylenders,
traders, employers, relatives, etc., without RBI regulation.
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Exercise
Answers
1. In situations with high risks, credit might create further problems for
the borrower. Explain.
In high-risk situations,
borrowers may fail to earn enough income to repay the loan. For example, if
crops fail due to pests, drought, or floods, farmers cannot repay loans. They
may have to borrow again, sell assets, or fall into a debt trap. Thus, instead
of helping, credit can worsen their financial condition.
2. How does money solve the problem of double coincidence of wants? Explain
with an example of your own.
Money acts as a medium of
exchange and removes the need for double coincidence of wants.
Example:
A carpenter wants rice and sells furniture. Instead of finding a farmer who
needs furniture, the carpenter sells furniture for money and uses the money to
buy rice. Thus, money makes exchange easier.
3. How do banks mediate between those who have surplus money and those who
need money?
Banks collect deposits from
people who have surplus money. They keep a small portion as cash and lend the
remaining amount to people who need loans. In this way, banks act as
intermediaries between depositors and borrowers.
4. Look at a ₹10 note. What is written on top? Can you explain this
statement?
The note carries the
statement:
"I promise to pay the
bearer the sum of ten rupees."
This promise is made by the
Governor of the Reserve Bank of India. It means that the RBI guarantees the
value of the currency note and people can use it as legal money throughout
India.
5. Why do we need to expand formal sources of credit in India?
Formal sources of credit
should be expanded because:
- They charge lower
interest rates.
- They are regulated by
RBI.
- They protect borrowers
from exploitation.
- They reduce dependence on
moneylenders.
- They promote economic
development.
- Poor people can get
affordable loans.
6. What is the basic idea behind the SHGs for the poor? Explain in your own
words.
Self Help Groups (SHGs)
organise poor people, especially women, into small groups. Members save money
regularly and provide loans to each other. After building a good record of
savings and repayment, the group can obtain loans from banks. SHGs help poor
people get credit without collateral and become financially independent.
7. What are the reasons why the banks might not be willing to lend to
certain borrowers?
Banks may refuse loans
because:
- Borrowers do not have
collateral.
- They lack proper
documents.
- Their income is
uncertain.
- There is a risk of
non-repayment.
- They have no credit
history.
8. In what ways does the Reserve Bank of India supervise the functioning of
banks? Why is this necessary?
RBI supervises banks by:
- Monitoring cash reserves.
- Regulating lending
activities.
- Ensuring compliance with
banking rules.
- Collecting information
about loans and deposits.
- Protecting depositors'
interests.
Necessity:
This ensures safety, fairness,
stability, and public confidence in the banking system.
9. Analyse the role of credit for development.
Credit plays an important role
in development by:
- Supporting agriculture,
trade, and industries.
- Increasing production and
employment.
- Helping people start
businesses.
- Raising income levels.
However, if credit is costly
or used in risky situations, it can lead to debt traps. Therefore, affordable
and timely credit is essential for development.
10. Manav needs a loan to set up a small business. On what basis will Manav
decide whether to borrow from the bank or the moneylender?
Manav should compare:
- Interest rate
- Repayment conditions
- Collateral requirements
- Processing time
- Documentation
requirements
If he can provide documents
and collateral, a bank loan is better because it has lower interest rates. If
immediate money is needed and documents are unavailable, he may approach a
moneylender, though it is more expensive.
11. In India, about 80% of farmers are small farmers who need credit for
cultivation.
(a) Why might banks be unwilling to lend to small farmers?
Banks may be unwilling
because:
- Small farmers often lack
collateral.
- Their income depends on
uncertain weather conditions.
- Crop failure increases
repayment risk.
(b) What are the other sources from which small farmers can borrow?
- Moneylenders
- Traders
- Landowners
- Relatives and friends
- Cooperative societies
- Self Help Groups
(c) Explain with an example how the terms of credit can be unfavourable for
the small farmer.
Example:
Shyamal borrowed from an
agricultural trader at 3% interest per month and was forced to sell his crop to
the trader at a low price. This reduced his income and made repayment
difficult.
(d) Suggest some ways by which small farmers can get cheap credit.
- Expansion of rural
banking.
- Strengthening cooperative
societies.
- Promoting SHGs.
- Government subsidy
schemes.
- Easier collateral
requirements.
- Low-interest crop loans.
12. Fill in the blanks
(i)
Majority of the credit needs
of the poor households are met from informal sources.
(ii)
Higher costs of borrowing increase
the debt burden.
(iii)
Reserve Bank of India (RBI) issues currency notes on
behalf of the Central Government.
(iv)
Banks charge a higher interest
rate on loans than what they offer on deposits.
(v)
Collateral is an asset that the borrower
owns and uses as a guarantee until the loan is repaid to the lender.
13. Choose the most appropriate answer
(i) In a SHG most of the decisions regarding savings and loan activities
are taken by
✅ (b) Members
(ii) Formal sources of credit do not include
✅ (c) Employers
Additional Project / Activity (Sample Answer)
|
Occupation |
Reason for Needing a Loan |
|
Construction worker |
Medical expenses, house repair |
|
Graduate student |
Higher education, computer purchase |
|
Government employee |
House purchase, vehicle purchase |
|
Migrant labourer |
Daily expenses, family support |
|
Household maid |
Medical treatment, education of children |
|
Small trader |
Business expansion, stock purchase |
|
Auto rickshaw driver |
Purchase of vehicle, repairs |
|
Factory worker (factory closed) |
Starting a new business, daily expenses |
People Likely to Get Bank Loans
- Government employee
- Graduate student
- Small trader
- Autorickshaw driver (with
documents)
People Less Likely to Get Bank Loans
- Migrant labourer
- Household maid
- Construction worker
- Factory worker after job
loss
Criterion Used
Banks usually lend to people
who have:
- Stable income
- Proper documents
- Good repayment capacity
- Collateral/security
Very Important 3-Mark Answers for Exams
Difference between Formal and Informal Credit
|
Formal Credit |
Informal Credit |
|
Regulated by RBI |
Not regulated |
|
Low interest rate |
High interest rate |
|
Includes banks and cooperatives |
Includes moneylenders, traders, employers |
|
Safer and transparent |
Risk of exploitation |
Difference between Money and Barter
|
Money |
Barter |
|
Uses currency |
Direct exchange |
|
Easy transactions |
Difficult transactions |
|
No double coincidence needed |
Double coincidence needed |
|
Widely accepted |
Limited acceptance |
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