Class 10 Economics Ch 3: Money & Credit

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Money as a Medium of Exchange Barter System: Exchange of goods for goods. Requires Double Coincidence of Wants : both parties must agree to sell and buy each other's commodities. Difficulties: Lack of double coincidence, difficulty in measuring value, lack of divisibility. Money: An intermediate in the exchange process. Eliminates the need for double coincidence of wants. Acts as a medium of exchange, unit of account, store of value, and standard of deferred payment. Modern Forms of Money Currency: Paper notes and coins. Issued by the central bank (e.g., RBI in India) on behalf of the government. No intrinsic value (unlike gold/silver coins), but accepted as a medium of exchange because it is authorised by the government. Law legalises the use of rupee as a medium of payment that cannot be refused in settling transactions in India. Deposits with Banks: People deposit extra cash with banks by opening a bank account. Banks pay interest on deposits. People can withdraw money as and when they require ( demand deposits ). Demand deposits are considered money because they can be used to settle payments. Cheques: 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 (e.g., 15% in India) for daily withdrawal requests. A major portion of deposits is used to extend loans. Banks charge a higher interest rate on loans than what they offer on deposits. The difference between these two rates is the bank's main source of income. Banks act as an intermediary between those who have surplus funds (depositors) and those who are in need of these funds (borrowers). Two Different Credit Situations Credit (Loan): An agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future repayment. Case 1 (Festival Season - Shoemaker): Credit helps to meet working capital needs, complete production on time, and increase earnings. Here, credit is beneficial. Case 2 (Swapna's Problem - Farmer): Crop failure leads to inability to repay the loan, forcing her to sell land or take more loans. This is a debt trap . Here, credit is detrimental. Credit can be both useful and harmful, depending on the risks involved and the support available. Terms of Credit Every loan agreement specifies an interest rate, which the borrower must pay to the lender along with the repayment of the principal. Interest Rate: The cost of borrowing money. Collateral (Security): An asset that the borrower owns (e.g., land, building, vehicle, livestock, bank deposits) and uses as a guarantee to a lender until the loan is repaid. If the borrower fails to repay, the lender has the right to sell the collateral to obtain payment. Documentation Requirement: Papers verifying employment, income, property, etc. Mode of Repayment: Specific schedule for future repayments. Terms of credit vary substantially from one credit arrangement to another. Variety of Credit Arrangements Formal Sector Credit: Lenders: Banks and Cooperative Societies. Supervised by the Reserve Bank of India (RBI). RBI monitors banks maintaining minimum cash balance and interest rates. Aims to provide loans at reasonable interest rates to all, especially small borrowers. Examples: crop loans, housing loans. Informal Sector Credit: Lenders: Moneylenders, traders, employers, relatives, friends. No organisation to supervise their lending activities. Can charge any interest rate and use unfair means to get their money back. No collateral often required, but interest rates are usually very high. Examples: loans from local moneylender. Formal vs. Informal Credit Feature Formal Sector Informal Sector Lenders Banks, Cooperatives Moneylenders, Traders, Employers, Relatives, Friends Interest Rates Low and fixed High and variable Supervision RBI None Collateral Often required Sometimes not required, but terms can be harsh Aim Social welfare, reasonable rates Profit maximisation Debt Trap Less likely Very common Self Help Groups (SHGs) for the Poor A group of 15-20 members, usually women, who pool their savings. Members can take small loans from the group itself at a reasonable interest rate to meet their needs. After a year or two, if the group is regular in savings, it becomes eligible for a loan from the bank. Advantages: Helps borrowers overcome the problem of lack of collateral. Provides timely loans at a reasonable interest rate. Helps women become financially self-reliant. Provides a platform to discuss various social issues like health, nutrition, domestic violence. Grameen Bank of Bangladesh: A success story of providing credit to the poor, especially women, through SHGs.