MONEY

Money is something that can act as a medium of exchange in transaction . In day to day
transactions , goods are being bought & sold with the use of money .
Money as a Medium of Exchange
Money acts as –
 an intermediate in the exchange process
 as a store of value
 as a unit of account
 person holding money can easily exchange it for any commodity or service that he or
she might want.
 In the early times, people used to exchange one commodity for another, depending on
their requirement under the Barter System. However, exchanging goods in the barter
system required a double coincidence of wants. 
Double Coincidence of wants :-
When in the exchange, both parties agree to sell and buy each other commodities. It is called
double coincidence of wants. In the barter system double coincidence of wants is an essential
feature. OR The occurrence when the wants of buyers and sellers both get fulfilled
simultaneously in the process of exchange of mutually possessed goods is known as double
coincidence of wants. Both parties, the seller and buyers have to agree to sell and buy each
others commodities. Goods are directly exchanged without the use of money.
For example, a person has rice but he is in need of wheat and other who has wheat but
he is in need of rice. Then they will exchange their goods. This exchange is known as double
coincidence of wants.
Modern form of Money:-
In the early ages, Indians used grains and cattle as money. Thereafter came the use of metallic
coins – gold, silver, copper coins – a phase which continued well into the last century. Now,
the modern forms of money include currency – paper notes and coins. The modern forms of
money – currency and deposits – are closely linked to the workings of the modern banking
system.
The modern currency is without any use of its own. Then, why is it accepted as a
medium of exchange?

 It is accepted as a medium of exchange because the currency is authorized by the

government of the country.
 In India, the Reserve Bank of India issues currency notes on behalf of the central
government. As per Indian law, no other individual or organization is allowed to issue
currency.
 Moreover, the law legalizes the use of a rupee as a medium of payment that cannot be
refused in settling transactions in India. No individual in India can legally refuse a
 payment made in rupees. Hence, the rupee is widely accepted as a medium of
exchange.
What is monetary system
 The monetary system refers to a set of institutions that provides a supportive framework
for the creation of money in an economy by the government. There are 3 types of
monetary system:
Commodity money
.This is made up of precious metals or other commodities that have intrinsic value. In order words, the monetary system
uses the commodity physically in terms of currency. This form of money retains its value even if it’s melted down. For
example, gold and silver coins have been commonly used throughout history as a form of money. Gold and silver
coins are the perfect example of commodity money.
Commodity-based money.

This draws its value from a commodity but doesn’t involve handling the commodity regularly. The
notes don’t have tangible value but can be exchanged for the commodity it is backed by. For
example, the US Dollar used to draw its value on gold. This was known as the Gold Standard.

Fiat money

In this monetary system the currency, which by government decree is legal tender, i.e., that the
government guarantees the value of the currency. Today, most monetary systems are fiat
money because people use notes or bank balances to make purchases. Fiat money is made up of
paper currency or a base metal coin. However, today, most of fiat money is in the form of bank
balances and records of credit or debit card purchases.

Currency:- A currency has to be derived from the Latin word “currere” which means “to
run” or “to flow”. On the contrary, Money has been derived from the Roman word “monere”
which means “to warn” in Latin.
Currency is a medium of exchange for goods and services. In short, it's money, in the form of
paper and coins, usually issued by a government and generally accepted at its face value as a
method of payment.
 Metallic Money
 Paper Money
 Credit Money.
The first two kinds of money are in the form of currency money and the last one is credit or
bank money.
1. In India, the Reserve Bank of India issues currency notes on behalf of the central
government.
2. No other individual or organization is allowed to issue currency. The rupee is widely
accepted as a medium of exchange in India.
All currency has the same basic goals:-
 It helps encourage economic activity by increasing the market for various goods.
  It enables consumers to store wealth and therefore address long-term needs.
Difference Between Money vs Currency:-
MONEY CURRENCY
Money is something that we give to Currency is the unit of money. It is different
purchase something or which we have in in different countries.
our bank lockers.
It is a medium of exchange. Modern form of money include currency
paper note and coins.
Money is anything which is generally currency is authorized by the government
accepted as a medium of exchange to be treated as money in the nation.
Money is a broader term that refers to an Currency is simply one, tangible form of
intangible system of value that makes the money. currency is the paper money or
exchange of goods and services possible, coins that we carry around to make our day
now and in the future.  to day payments.
money is the actual value that is traded for A currency is the authorised standard for
goods and services. currency is the paper monetary exchange which has been
money or coins that we carry around to adopted by an organisation, which usually
make our day to day payments. is a government or a country. However,
any organisation can have their own
currency. EX--- USD- The US Dollar, INR-
The Indian National Rupees.
Deposits in Banks:-
The other form in which people hold money is as deposits with banks. People deposit their
extra cash with the banks by opening a bank account in their name. Banks accept the deposits
and also pay an amount as interest on the deposits.

Demand Deposites- The deposits in the bank accounts can be withdrawn on demand,
these deposits are called demand deposits. The payments are made by cheques instead of
cash. Most demand deposit accounts (DDAs) let you withdraw your money without advance
notice, but the term also includes accounts that require six days or less of advance notice. NOW
accounts are essentially checking accounts where you earn interest on the money you have
deposited.There are three types of Demand Deposits:
(1) checking accounts, (2) savings accounts, and (3) money market accounts
Features of Demand Deposites:-
(i) The demand deposits encashable by issuing cheques have the essential features of
money.
(ii) They make it possible to directly settle payments without the use of cash.
(iii) Since demand drafts/cheques are widely accepted as a means of payment along with
currency, they constitute money in the modern economy.
Example- Workers who receive their salaries at the end of each month have extra cash at
the beginning of the month. This extra cash is deposited with the bank by opening a bank
account in their name. Banks accept the deposits and also pay an interest rate on the deposits.
Fixed deposit :-

A fixed deposit:- It allows you to invest your funds for a fixed term and earn returns at a
fixed interest rate. The interest rate on your FD is higher than a savings account so that you
can grow your savings furthermore. 
Example- In a Fixed Deposit, you put a lump sum in your bank for a fixed tenure at an
agreed rate of interest. At the end of the tenure, you receive the amount you have invested
plus compound interest. FDs are also called term deposits. Interest rates.

How is interest calculated on a term deposit?

Interest is calculated by dividing the per annum interest rate by 365 to get the daily interest
rate, then multiplied by the number of days of the term deposit investment term.
NOTE--The top six benefits of a fixed deposit include a high-interest rate,
guaranteed returns, tax benefits, flexible tenure, it is a one-time investment, and
you can take a loan against an FD.
DEMAND DEPOSIT FIXED DEPOSIT
Depositors can withdraw any or all of the It is a saving account which cannot be
funds in a demand deposit account at any time withdrawn until the maturity date. It can only
without penalty or prior notice required. be withdrawn after a prior notice.

The interest rate on demand deposits is very Fixed deposits carry a higher interest rate.
low.
Demand deposits can be withdrawn at any Fixed deposits can be withdrawn only after the
Time. expiry of a specific period.

Demand deposits are chequable, i.e. they can Fixed deposits are not chequable.
be withdrawn through cheques.

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. Or A cheque
is written order given by the account holder to the bank to pay the sum of money specified
therein to himself or to the person in whose favor the cheque is issued.
Features of Cheque:-
 Cheques can be issued against savings or current accounts
 A cheque is always drawn on a specified banker
 It is an unconditional order
 The payee of a cheque is fixed and certain and cannot be changed
 The payment will only be made in the name of the payee/beneficiary
 It is an instrument that is payable on demand
 A cheque will be considered invalid if does not contain the date

Steps to Write a Cheque

Do Don'ts

 Step 1: The first step is to cross a  Never overwrite on a cheque leaf

cheque, which means to draw two
lines, which are parallel to each
other, on the left hand corner of the
document.
 Step 2: Write the date and write the
name of the payee in the 'Pay'
column. Proceed to write the
amount in words and add 'only' in
the end,
 Step 3: And then write it in numbers
followed by this symbol '/-.'
 Step 4: Sign at the bottom of the
cheque
 Remember never to leave any kind of
space between number or words on the
leaf
 Never leave any column blank on a
cheque
 Do not fold or staple a cheque
 Sign clearly and always use the same
signature

FAQs on Cheque:-
1) What is an IFSC code? Is it printed on all cheques?
Ans- Indian Financial System Code, abbreviated as IFSC, is defined as a 11-digit alphanumeric
code that acts as a unique identity for a specific bank branch. Yes. IFSC code is printed on all
cheques issued by banks and this code helps in the identification of bank branches and
clearing of cheques in an error-free manner.
2) What is the purpose of an MICR code on a cheque leaf?
Ans- The 9-digit MICR code is an essential and important feature on all cheques. It helps banks
process cheques without any error and in a speedy fashion.
3) Where is the MICR number printed on a cheque leaf?
Ans- This number is generally printed at the bottom of the cheque. However, this may
sometimes vary from bank to bank.
4) What is a cheque number?
Ans- A cheque number is a unique number that is printed on each cheque leaf. This consist of
6-digits.
5) When does a bank have a right to refuse to make a payment?
Ans- 1) In cases when the cheque is undated
2) If 6 months have passed since the issue of the cheque
3) When a postdated cheque is presented before its date
6) Is a cheque paid only during banking hours?
Ans- Yes. A bank is liable to pay only during working hours.
7) What are the consequences if a banker makes a wrong payment on a crossed cheque?
Ans- The bank will be liable for the loss occurred.
8) Who has the right to cross the cheque?
Ans- The drawer, holder and then banker have the right to cross a cheque.
9) Who governs cheque transactions in India?
Ans- The Negotiable Instruments Act along with the Reserve Bank of India.
10) What if a cheque gets lost during the clearing process?
Ans- The bank will inform the customer that is the issuer of the cheque, at the earliest and the
customer is also entitled to reimbursement.
Cheque Types:
1. Bearer Cheque- For example: A cheque has been signed by Arjun (drawer) and the
payee for the cheque is Varun. Varun can either go to the bank himself or can send a
third person to get encashment for the cheque. No identification shall be required for
the bearer’s name. 
2. Order Cheque- For Example: If a cheque has been signed with the name of Varun, then
only the payee can visit the bank to get an encashment for the same for a order cheque.
3. Crossed Cheque- A crossed check is any check that is crossed with two parallel lines,
either across the whole check or through the top left-hand corner of the check. This
double-line notation signifies that the check may only be deposited directly into a bank
account.
4. Account Payee Cheque- Payee: The person named in the cheque who is to receive the
payment. Drawee: The specific bank on which the cheque has been drawn. Drawer: The
person who writes the cheque, who can be the account holder or the customer. The
payee and drawer can be the same person
5. Stale Cheque- For example: If a cheque is dated January 1, 2021, and the payee visits
the bank for withdrawal on May 1, 2021, his/her request shall be denied and the cheque
is declared stale.
 6. Post Dated Cheque- For example: If the date on which the drawer is filling the cheque is
May 10, 2021, but he wants the payment to be done later, he/she can fill the cheque
dates as May 30, 2021. It shall be called a post-dated cheque.
7. Ante Dated Cheque- For example: If the current date is January 30, 2021, and the
drawer dates the cheque as January 1, 2021. It shall be considered as an ante-dated
cheque.
8. Self Cheque- For example: If a person wants Rs.1,00,000/- in cash, he can issue a self
cheque and visit his bank branch where he owns an account and get encashment in
place of a cheque.
9. Traveler’s Cheque- If a person is travelling abroad, he can carry the traveller’s cheque
and get encashment for the same in abroad countries. 
10.Mutilated Cheque- If the cheque is torn from the corners and all the important data on
the cheque is intact, then the bank may not process the cheque further. 
11.Blank Cheque- a signed check with the amount unspecified. 2 : complete freedom of
action or control

Essentials of a Cheque:-There are certain extremely important pointers or features of a

cheque which should be known and understood before using this payment mode for money
transfer. Some of the important pointers related to a cheque are:
 A cheque is an unconditional order.
 A cheque’s payment is always in cash.
 A cheque is always drawn on a particular Bank.
 A cheque is always payable on demand.
 Signature on the exchequer is mandatory and should be only by the maker.
 The amount is always a certain sum of money from one’s account.
 This cash amount is to be paid to the person mentioned therein, or order, or the bearer.
Loan Activities of Banks:-
Banks keep only a small proportion of their deposits as cash with themselves. These days
banks in India hold about 15% of their deposits as cash. This is kept as a provision to pay the
depositors who might come to withdraw money from the bank on any given day. Banks use
the major portion of the deposits to extend loans. There is a huge demand for loans for
various economic activities. Banks charge a higher interest rate on loans than what they offer
on deposits. The difference between what is charged from borrowers and what is paid to
depositors is their main source of income for banks.
Two Different Credit Situations:-
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.
Here are 2 examples which help you to understand how credit
works.
Festive Season:
In this case, Salim obtains credit to meet the working capital needs of production. The credit
helps him to meet the ongoing expenses of production, complete production on time, and
thereby increase his earnings. In this situation, credit helps to increase earnings and therefore
the person is better off than before.
Swapna’s Problem:
In Swapna’s case, the failure of the crop made loan repayment impossible. She had to sell part
of the land to repay the loan. Credit, instead of helping Swapna improve her earnings, left her
worse off. This is an example of debt-trap. Credit, in this case, pushes the borrower into a
situation from which recovery is very painful. Whether credit would be useful or not, depends
on the risks in the situation and whether there is some support, in case of loss.
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. In addition, lenders also demand collateral
(security) against loans.
The four terms of credit are:
 Interest rate. The borrower has to pay a sum of money as interest along with the
principal amount.
 Collateral. It is an asset that the borrower owns and uses this as a guarantee – to the
lender untill the loan is repaid.
 Documentation. ...

 Mode of repayment.

Collateral (Security) is an asset that the borrower owns (such as land, building, vehicle,
livestocks, deposits with banks) 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.
Interest rate, collateral and documentation requirement and the mode of repayment,
together is called the terms of credit. It may vary depending on the nature of the lender and
the borrower.
Formal Sector Credit in India:-
Cheap and affordable credit is crucial for the country’s development. The various types of
loans can be grouped as:
Formal sector loans:
These are the loans from banks and cooperatives. The Reserve Bank of India supervises the
functioning of formal sources of loans. Banks have to submit information to the RBI on how
much they are lending, to whom, at what interest rate, etc.
Informal sector loans:
These are the loans from moneylenders, traders, employers, relatives and friends, etc. There is
no organisation which supervises the credit activities of lenders in the informal sector. There is
no one to stop them from using unfair means to get their money back.

Formal Sector Loans Informal Sector Loans

The Reserve Bank of India (RBI) There is no organisation which

organises the functioning of formal supervises the loan activities of
sources of loans. lenders.

RBI checks on how much they are They can lend the money at
lending and at what interest. whatever interest rate they select.

This sector has some rules and No one can stop them using unfair
boundaries to get the money back. means to get their money back.

They charge reasonable interest as They charge much higher interest as

compared to informal lenders on compared to formal lenders on
credit. credit.

The main motive is to make their

The main motive is public welfare.
own profits.

This includes traders, moneylenders,

This includes banks and cooperatives.
employers, friends etc.

Self Help Groups for the Poor:-

Self Help groups are groups of rural poor people (especially women). The idea is to help them
organize themselves, help them financially, provide them work, help them in other matters
including domestic issues. Government provides such groups loans at very low interests and
provides help to market the products of SHG.
Poor households are still dependent on informal sources of credit because of the following
reasons:
1) Limited availability of Banks in rural areas.
2) People in the rural areas face problem with regard to documentation.
3) Absence of collateral is one of the major reasons which prevents the poor
from getting bank loans.
4) Rural people get easy loans from the richer households through informal.
To overcome these problems, people created Self Help Groups (SHGs).
1. SHGs are small groups of poor people which promote small savings among their
members.
2. A typical SHG has 15-20 members, usually belonging to one neighbourhood, who
meet and save regularly.
3.  People form their personal groups for the purpose of savings and also lend
money among themselves.
4. Rate of interest is lower than imformal service providers.
5. They can also avail loans from banks if their savings are regular.
Advantages of Self Help Group (SHG):-
 It helps borrowers to overcome the problem of lack of collateral.
 People can get timely loans for a variety of purposes and at a reasonable interest rate.
 SHGs are the building blocks of organisation of the rural poor.
 It helps 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.
  Members can take loans from the groups savings themselves on a decided rate of
interest.
 The rate of interest is much lower than the interest that is charged by the informal
sources.
 After two years of regular savings, the SHG can also take a loan from the bank.
 The loan is given in the name of the group and creates tremendous opportunities for the
self-employment of the members.
 Due to SHG, the poor members are able to avail of loans even in the absence of
collateral.
 Many women as members of SHGs have become economically independent. This has
led to women's empowerment at the rural levels.