Chapter: 3

Class: 10
Subject: Social Science (Economics)
Prepared by: Binal Patel (TGT-S.S.)
Topics in the chapter
Money as a medium of exchange

Modern forms of money

Loan activities of Banks

Two different credit situations

Terms of credit

Formal sector credit in India

Informal sector credit in India

Self Help Groups for the poor

What is Money?
• Money is something that can be used as a means of
payment, a measure of value, or a medium of
exchange.
• For example, currency notes, metal coins, demand
deposits, etc.
 Barter System
• In ancient times when the concept of money was
not evolved, people used to transact through the
barter system of exchange.
• The barter system was used before the advent of
money.
• People used to exchange one thing for another
in this system.
Double Coincidence of wants
• The double coincidence of wants is the major drawback
of the barter system.
• It can be very difficult to find a person who can fulfill this
condition.
• There is no common value of exchange in this system.
•This drawback was eliminated by
the invention of money.
•It can be accepted as a common
medium of exchange and can also
be easily sorted.
Money as a Medium of Exchange
• Money is a means by which we can get something in
exchange.
• Initially, coins came into use. The coins were initially made of
precious metals; like gold and silver.
• When the precious metals became too precious, ordinary
metals were being used for making coins.
• Paper money or currency notes gradually took place of coins;
although coins of smaller denominations are still in use.
• In modern economies, money functions as a medium of
exchange.
• A person holding money can exchange it for any desired
good and service in the market.
Currency
 Deposits with Banks
• The other forms in which people hold
money is deposits with Banks.
• People deposits their extra money in
banks by opening a bank account.
• Banks also provide interest to the people
on their deposits.
• People also have the provision to
withdraw their money when they need it.
• Since this money is withdrawn on
demand, hence these deposits are also
called demand deposits.
Loan Activities by Bank
• The bank maintains only a certain portion of deposits as cash
with them and most deposits are used to extend loans.
• People may require loans for their economic activities.
• Thus, banks make use of these deposits to meet the loan
requirement of people.
• Banks charge a higher rate of interest on loans than the
interest they pay on deposits.
• The difference between the amount of interest received and
paid is their main source of income.
Two Different Credit Situations
• A large number of transactions in our day-
to-day activities involve credit in some form
or the other.
• 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.
• Let us see how credit works through the
following two examples.
• 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.
• Credit therefore plays a vital and positive role
in this situation.
• 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 what is commonly called debt-trap.
• Credit in this case pushes the borrower into a situation from which
recovery is very painful.
Two Different Credit Situations
• In one situation credit helps to increase earnings
and therefore the person is better off than
before.
• In another situation, because of the crop failure,
credit pushes the person into a debt trap.
• To repay her loan she has to sell a portion of her
land. She is clearly much worse off than before.
• Whether credit would be useful or not,
therefore, depends on the risks in the situation
and whether there is some support, in case of
loss.
Variety of credit arrangements
• In rural areas, there may be different credit arrangements for
different categories of borrowers. Some are as follows:
i. Loan from money lenders: Small farmers take loan from
moneylenders at very high interest rate. It is the main cause
of the debt trap in rural areas.
ii. Loan from Traders: Farmers get loans from agriculture
traders at the lower rate of interest. The traders also get the
promise offer from the farmers to sell their crops to him.
iii. Loan from Banks: It is the most trusted way to take loans.
Medium and large farmers take loan against security from
banks at very low interest rate and at easy repayment terms.
iv. Loans from Employers: Landless labourers, take loans from
their employees and to repay the loans and interest, the
labourers work for landowners.
 Loans from Cooperatives
• Cooperative societies are small scale
organizations formed by people themselves.
• Members of a cooperative pool their resources for
cooperation in certain areas.
• With these deposits as collateral, the cooperatives
obtain a large loan from the banks.
• These funds are used to provide loans to
members.
• For example, Krishak Cooperative provides loan
for the purchase of agricultural implements,
cultivation, agricultural trade, fisheries, etc.
 Credit sources in India
• Credit refers to an agreement in which the lender
supplies the borrower with money, goods or
services in return for the promise of future
payment.
• Types of loan/credit can be grouped into two
categories:
1. Formal Sector Credit
2. Informal Sector Credit
 Formal Sector Credit
• Formal sector comprises banks and cooperative
societies where credit is given with complete
documentation.
• Its features are as follows:
a) It provides loans comparatively at a lower
rates.
b) Collateral security is required to obtain
loans.
c) This sector is mainly supervised by Reserve
Bank of India.
d) It includes banks and cooperative societies.
 Informal Sector Credit
• Informal sector consist of money lenders,
friends, traders, large landowners, etc.
• Its feature are as follows:
a) These lenders charge a higher rate of
interest than banks and cooperatives.
b) Some time collateral is not needed
while obtaining loan.
c) It is supervised by none of the
institutions.
Role of RBI in Formal Sector
a) RBI ensures that the banks give loans not
just to profit making businesses but also to
small cultivators and small scale industries.
b) Banks also have to submit the report
regarding the lending, interest rate charged
on loan etc. to RBI.
c) Banks have to maintain a minimum cash
balance out of demand deposits they have
with RBI.
d) RBI performs this function in order to
control the liquidity in market.
Formal and Informal Credit:
Who gets what?
 Self Help Groups for the Poor
• The self-help group is the modern form of financing the
small finance needs of borrowers who cannot obtain
loans from banks because of their inadequate financial
documents and lack of collateral.
• A self-help group is a small group of people, usually
ranging from 15 to 20 persons belonging to the same
neighbourhood that promotes small savings among their
members.
• The members pool their savings, and the amount so
collected is utilized to lend it to any member who needs it.
• The terms of credit in self-help groups is much easier as
compared to any other form of finance.
• Also, the self-help groups have helped extensively in
saving the poor from the debt trap of informal sectors.
 SHGs providing a helping hand to
women
• SHGs are the building blocks of organisation of the rural poor.
• 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.