ECONOMICS (X)-LESSON-3 MONEY AND CREDIT (LESSON NOTES)

ECONOMICS (X)-LESSON-3

MONEY AND CREDIT

(LESSON NOTES)

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v introduction

Ø        Money is a fascinating subject and full of curiosities. It is important to capture this element for the students. The history of money and how various forms were used at different times is an interesting story. Credit is a crucial element in economic life so it is important to understand this concept. This chapter focuses on these topics.

v MONEY

Ø             Money is something that can be used as a medium of exchange. Before the     introduction of money, things were exchanged, which was known as barter     system. But there were many problem in the barter system as-

§  In the barter system it is difficult to calculate the value of things.

§  In the barter system double coincidence of wants is necessary condition to exchange the things. It means both parties have to agree to sell and buy each other’s commodities. A person desires to sell is exactly what the other wishes to buy.

§  It is very difficult to store or to carry the things over the time and distance.

§  In the barter system the people face the problem of divisibility also. It means people who have only horse, how he will take 2 kg rice.

v FUNCTIONS OF MONEY

Ø Money acts as an intermediate in the exchange process, so it is called a medium of exchange.

It      It solves the problem of double coincidence of wants.

Ø  We can calculate the value of things with the help of money.

Ø             It is very easy to carry the money and we can also store it for many years.

Ø             There is no problem of divisibility in the money.

v FORMS OF MONEY

Ø             Before the introduction of coins, a variety of objects was used as money.         For example, since the very early ages, Indians used grains and cattle as         money.

Ø         Thereafter came the use of metallic coins — gold, silver, copper coins — a     phase which continued well into the last century.

Ø         Modern forms of money include currency — paper notes and coins.

Ø             Money deposits in the banks also describe as the modern form of money         because it also used as medium of exchange.

v MONEY AS A MEDIUM OF EXCHANGE

Ø      Money accepted as a medium of exchange because the currency is authorised by the government of the country.

Ø     In India, the Reserve Bank of India issues currency notes on behalf of the central government. As per Indian law, no other individual or organisation is allowed to issue currency.

Ø   Moreover, the law legalizes the use of rupee as a medium of payment that cannot be refused in settling transactions in India.

 N  No individual in India can legally refuse a payment made in rupees. Hence, the rupee is widely accepted as a medium of exchange.

v DEPOSITS WITH BANKS

Ø The other form in which people hold money is as deposits with banks.

Ø Banks accept the deposits and also pay an amount as interest on the deposits. In this way people’s money is safe with the banks and it earns an amount as interest.

Ø People also have the provision to withdraw the money as and when they require.

Ø Since the deposits in the bank accounts can be withdrawn, these deposits are called demand deposits.

v CHEQUE:

Ø 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.

v functions of banks

Ø The persons who have excess money can deposit their money in the banks. Banks keep only a small proportion of their deposits as cash with themselves.

Ø In India these days hold about 15 per cent of their deposits as cash(CRR). This is kept as provision to pay the depositors who might come to withdraw money from the bank on any given day.

Ø Banks use the major portion of the deposits to extend loans to those persons who required money. There is a huge demand for loans for various economic activities.

Ø Banks charge a higher interest rate on loans than what they offer on deposits. 

Ø The difference between what is charged from borrowers and what is paid to depositors is their main source of income.

v ROLE OF RBI

Ø  RBI issues currency notes on behalf of the central government.

Ø  It issues guidelines for fixing rate of interest on deposits and lending by banks.

Ø  It ensures that banks should maintain a minimum cash balance out of the deposits they receive.(CRR-Cash Reserve Ratio)

Ø  It ensures that the banks should give loans not only to profit making businesses but also to poor people and small traders.

Ø   Periodically, the banks have to submit a report to the RBI on how much they are lending, to whom and at what interest rate.

v CREDIT OR LOAN

Ø 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.

Ø ROLE OF CREDIT-POSITIVE

§  It helps people from all walks of life in setting up their business, increase their income and provide support to their family needs.

§  It makes it possible for the people to own or construct their own house and get relief from monthly rent.

§  People often avail themselves of credit to purchase luxury items like vehicles, A.Cs, etc., which further raises their standard of living.

§  It enables us to invest in human resource. People take credit for education, training, etc. which allows enrichment of human resource.

§  For example, Salim availed credit facility to meet the working capital needs of production. It helped him to meet the ongoing expenses of production, complete production on time, thereby, increasing his income.

Ø CREDIT MAY CREAT NEGATIVE SITUATION

§  Credit in some case pushes the borrower into a situation from which recovery is very painful.

§  Some time we take loan but the production is not according our expectation due to some reasons for example-

§  Sapna, a small farmer, grows groundnut in her three acres of land. She took a loan from the moneylender, hoping to repay the loan, once the crop is harvested. Being hit by the pest, the crop fails. Expensive pesticides did not make any difference. Sapna is unable to repay the moneylender and the other year, it becomes a bigger amount. Next year again, she took a loan for cultivation. It is not a bumper crop this year too. Sapna earns little, but it is not enough to repay the old loans. She had to sell a part of the land to repay the loan. She is caught in a debt. This situation is called debt-trap.

v TERMS OF CREDIt

Ø The condition on which the lender gives the loan to the borrower is known as terms of credit. In terms of credit these conditions are included:-

§  Interest rate, collateral and documentation requirement, and the mode of repayment together comprise what is called the terms of credit.

§  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 until the loan is repaid.

v DIFFERENT SOURCES OF CREDIT

Ø     The various types of loans can be conveniently grouped as formal sector         loans and informal sector loans.

Ø         FORMAL SECTOR LOANS 

§  The source of credit which is supervised by any Reserve bank of India is known as formal sources of credit. In these sources of credit the rate of Interest is comparatively low. It included the loan taken from banks and cooperatives.

Ø             INFORMAL SECTOR LOANS 

§  The source of credit which is not supervised by any agency is known as informal sources of credit. In these sources of credit the rate of Interest is comparatively high. It included the loan taken from moneylenders, relatives, friends etc.

v DIFFERENCES BETWEEN FORMAL AND INFORMAL SOURCES OF CREDIT

FORMAL SOURCE OF CREDIT	INFORMAL SOURCE OF CREDIT
These sources of credit supervise by RBI.	These sources of credit are not supervised by any government agency.
2. The rate of interest is low.	2. Here the rate of interest is high.
3. For these sources of credit collateral is compulsory.	3. For these sources of credit collateral is not compulsory.
4. Most of Rich, business class and middle class use these sources of credit to take loan.	4. Most of poor persons like peasant, farmers and labours use these sources of credit to take loan.
5. It included the loan taken from banks and cooperatives.	5. It included the loan taken from landowners, friends, relatives etc.

v IMPORTANCE OF CHEAP AND AFFORDABLE CREDIT

Ø      Cheap and affordable credit is crucial for the country’s development because:-

Ø  More lending would lead to higher incomes and encourage people to invest in agriculture, engage in business and set up small industries.

Ø    Cheap credit will enable more investment. This leads to acceleration of economic activity.

Ø  Cheap credit would also allow weaker sections of society to access formal sector of lending and get rid of from informal moneylenders.

Ø  Affordable credit would also end the cycle of debt trap.

Ø  Cheap and easy terms of credit would inspire better investment in technology and thus increase competition.

Ø So the government should increase the formal sources of credit specially in rural areas.

v SELF-HELP GROUPS FOR THE POOR

Ø A group of 15 to 20 poor villagers, especially women, who regularly pool money at regular intervals to meet the requirement of money in future at very low interest rate, is known as SHG.

Ø NEED OF SHG

Ø In India number of banks are very less in rural India

Ø To get the loan from a bank is more difficult for common people.

Ø Absence of collateral is one of the major reasons which prevent the poor from getting bank loans.

Ø The rate of interest rate is very high in the informal source of credit.

Ø So, people have tried out some newer ways of providing loans to the poors, that are SHG.

v IMPORTANCES OF SHGS

Ø Self-Help Groups are emerging as an important source of credit because:

Ø The members can take loans from the groups to meet their daily needs.

Ø All decisions regarding savings and loans are taken by the members of the group.

SHG MEETING IN GUJARAT

Ø They charge less interest on the loans than what the moneylenders charge.

Ø If the group is regular in its savings, they can also take loan from the bank. Loan is sanctioned in the name of the group. The group is responsible for the repayment of loan.

Ø They help borrowers to overcome the problem of collateral.

Ø They have freed borrowers from the clutches of the moneylenders.

Ø Not only does it help 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.