CHAPTER3

Money and Credit

MONEY AS AMEDIUM OF EXCHANGE Chapter Contents
Money act as an intermediate in the exchange process, it is called Money as a Medium of
a "medium of
exchange Exchange
I f both parties agree to sell and buy each
others commodities Modem Forms of Moncy
known as "double coincidence of wants" better known as
"Barter System" Loan Artivties ol Banks
Credit
MODERN FORMS OF MONEY Terms of Credit

Before the introduction of coins, a variety of objects was used as Se-help Groups for the Poor
money. Since the very early ages. Indians used grains and cattle
as
Assignment
money.
Thereafter gold, silver, copper coins are used as money
Currency: Modern forms of money include curency Paper
notes and coins.
Modern currency is not made of precioUs metal such as gold.
silver and copper
Modern curency is without any use of ts own. But it is accepted
as a medium of exchange because the currency is authornsed by
the govenment of the country.
I n India. the Reserve bank of India issues currency notes on
behalf of the central government. Indian law legalises the use of
rupee as a medium of payment that cannot be refused in setting
transactions in India.
People hold money with banks as deposit. Since the deposits in
the bank accounts can be withdrawn on demand, these deposits
are called "demand
deposits"
A cheque is a paper instructing the bank to pay a specific amount
from the persons' account to the person in whose name the
cheque has been issued.
Cheques makes it possible to directy settle payments without the
use of cash.
LOANACTIVITIES OF BANKS
Banks use the major portion of the deposits to extend loans.
.Banks make use of the deposit to meet the loan requirement of the people. In this way. banks mediate
between those who have surplus funds and those who are in need of these funds.
Banks charge a higher interest rate on loans than what they offer on deposits.
The difference between what is charged trom borrowers and what is paid to depositors is their main source
of Income.

CREDIT
Credit plays a vital and positive role in production.
. I n rural areas, the main demand for credit is for crop production
Crop production involves considerable costs on seeds, fertilisers. pesticides, water, electricity. repair of
equipment etc.

Repayment of the loan mainly depend on uhe income from farming.

DO YOU KNOW?
Credit: t refers to an agreement in which the lender supplies the borrower with money.

TERMSOF CREDIT
Interest rate. collateral and documentation requirement and the mode of repayment together comprise what
is called the "terms of credit."
Tem of credit may vary depending on the nature of the lender and the borrower.
Collateral is an asset that the borrower owns such as tand. building elc. 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

DOYOU KNOW?
Cooperatve socletles besides banks are the majorsource of cheap credit in rural areas.

Credit

CREDIT

FORMAL INFORMAL
Source: BANKS AND Source: MONEY LENDERS
coOPERATIVES

Formal Sector Credit In India

.Banks are source of formal sector credit. The Reserve Bank of lIndia supervises the functioning of formal
source of loans.
Sources of Credit for Rural Households in India in 2010
 Other Sources
Relative and Friends
Sources not speci?ed

Landlords- 45%
Traders-

Professional
and Agncue
Cooperatieand
commeraal bankS
money lenders 527%
18%

%
Government and other
formal sources
Banks and cooperative societies need to provide cheap and affordable credit which is crucial for the
country's development.

Informal Sector Credit In India

T h e informal lenders include money lenders, employees, relatives and friends.
There is no organisation which supervises the credit activities of lenders in the informal sector. They can
lend at whatever interest rate they choose. Thus, the cost to the borrower of infomal loan is much higher.
This could lead to increasing debt and debt trap

47% 20%
Poor 85% 53% Rich
household household
Household Well-off
with few asset housohold

Per cent of ioans trom the INFORMAL sector

Per cent of loans from the FORMAL sector
85 per cent of the loans taken by poor household in the urban areas are from informal sources.
The rich households are availing cheap credit from formal lenders whereas the poor households have to
pay a large amount for borowing.
While formal sector loans need to expand, it is also necessary that everyone receives these loans.

SELF-HELPGROUPS FOR THE POOR

A typical SHG has 15-20 members, USually belonging to one neighbourhood, who meet and save regularly.
Most of the important decisions regarding the saving and loan activities are taken by the group members.
SHGs can get timely Ioans for a variety of purpose and at a reasonable interest rate. Thus the SHGs
help borrowers overcome the problem of collatera
Moreover, SHGs are the buiding blocks of organisation of the rural poor.

DOGrameen
YOU KNOW?
Beank of Bangledesh is one of the biggest success stories in reaching the poor to meet their credit.
Its founder was Prof. Mohd. Yunus, recipient of Nobel Peace Prize, 2006.
 Assignment
SECTION-A SECTION-B
Objective Type Questions Matrix Match Type Question :
Which of the folowing bank issues curency notes 1. Match the following columns
on behalf of the central government?
(1) Bank of Baroda
Column Column
a. Formal sector loans () Money lenders
(2) Reserve bank of India b. Informal sector ioans() Bank
(3) Punjab national bank
c. Modem currency (i) Paper notes
(4) None of these
(1) aü). b(), ci) (2) afi, b(), cti)
Banks in India hold what per cent of their deposit
as cash?
3) aii), b), c(i) (4) a(i). b[), c(i)

(1) 15 (2) 6
(3) 17 (4) 18 SECTIONC
3. Which of the following supervises the functioning Very Short Answer Type Questions
of formal sources of loans? Whet is redi?
(1) Cooperative banks (2) NABARD What is double coincidence of wants?
(3) Rural Bank (4) RBI Which bank issues currency notes on behalf of
4. Which of the following is source of informal sector the central government?
loans?
AWhatis modern money?
(1) Money lenders Medi What is informal sector loans?
(2) Traders
Short Answer Type Questions
(3) Employees
(4) All of these 1. hat is terms of credit?
2. What is collateral?
5. Which of the folloing supervise the functioning of
informal sector? What is debt trap?
(1) RBI What is self help groups ?
(2) Cooperative bank
Long Answer Type Question
(3) National Bank
1. What is the basic idea behind the SHGs for the
(4) None of these poor? Explain.