Money and Credit

Created @October 7, 2022 1:10 AM

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Double coincidence of wants

What a person desires to sell is exactly what the other wishes to buy.

Barter system
In a barter system where goods are directly exchanged without the use of money,
double coincidence of wants is an essential feature.

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

b. It eliminates the need for double coincidence of wants.

c. Unit of account

d. store of value

e. (shoe seller example)

Modern Forms of money

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

2. Unlike the things that were used as money earlier, modern currency is not made
of precious metal such as gold, silver and copper.

3. And unlike grain and cattle, they are neither of everyday use. The modern
currency is without any use of its own.

4. It is accepted as a medium of exchange because the currency is authorised by

the government of the country.

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 5. In India, the Reserve Bank of India issues currency notes on behalf of the central
government.

6. As per Indian law, no other individual or organisation is allowed to issue

currency.

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

8. No individual in India can legally refuse a payment made in rupees.

9. Hence, the rupee is widely accepted as a medium of exchange.

Deposits with Banks

1. People deposit the extra cash with the banks by opening a bank account in their
name.

2. Banks accept the deposits and also pay an amount as interest on the deposits.

3. In this way people’s money is safe with the banks and it earns an amount as
interest.

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

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 Since the deposits in the bank accounts can be withdrawn on demand, these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

Cheque
1. Demand deposits offer another interesting facility called cheque.

2. 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 beeni ssued.

Advantages

1. The facility of cheques against demand deposits makes it possible to directly

settle payments without the use of cash.

2. Since demand deposits are accepted widely as a means of payment, along with
currency, they constitute money in the modern economy.

LOAN ACTIVITIES OF BANKS

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 1. Banks make use of the deposits to meet the loan requirements of the people.

2. In this way, banks mediate between those who have surplus funds (the
depositors) and those who are in need of these funds (the borrowers).

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

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

TWO DIFFERENT CREDIT SITUATIONS

Credit
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

GOOD
1. the obtained credit helps to meet the working capital needs of a production.

2. The credit helps people to meet the ongoing expenses of production, complete
production on time, and thereby increase their earnings.

3. Credit therefore plays a vital and positive role in this situation.

BAD
1. during natural calamitites credit repayment is painful to the farmer.

2. small producers are compelled to sell a part of of their land for repayment.

3. credit pushes the borrower into a debt trap.

4. Debt trap is a situation in which a loan is difficult or impossible to repay, it is

mainly caused due to high interest.

Conclusion
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.

read the story of salim and swapna from book as you might have to give examples
in this question

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 TERMS OF CREDIT
Defination: Interest rate, collateral and documentation required and the mode of
repayment and pricipal amount together comprise what is called the terms of credit

1. Interest Rate: Every loan agreement specifies an interest rate which the
borrower must pay to the lender along with the repayment of the principal.

2. Collateral: 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.

3. Documentation Requirement: Paperwork.

4. Mode of Payment: installment, Lump sum cash, Gold, property.

FORMAL SECTOR CREDIT IN INDIA

Formal sector loans Informal sector loans

1. Loans from banks and
cooperatives.
2. The Reserve Bank of India
supervises the functioning of formal
sourcs of credit.
1. Money Lenders, Traders,
employers, Relatives and friends
etc.
2. There is no organisation which
supervises the credit activities of
lenders in the informal sector.

Reserve bank of India

1. The Reserve Bank of India supervises the functioning of formal sources of loans.

2. The RBI monitors the banks in actually maintaining cash balance.

3. The RBI sees that the banks give loans not just to profit-making businesses and
traders but also to small cultivators, small scale industries, to small borrowers
etc.

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 4. Periodically, banks have to submit information to the RBI on how much they are
lending, to whom, at what interest rate, etc.

Credit activities in informal sector

1. There is no organisation which supervises the credit activities of lenders in the
informal sector.

2. They can lend at whatever interest rate they choose. There is no one to stop
them from using unfair means to get their money back.

3. Compared to the formal lenders, most of the informal lenders charge a much
higher interest on loans. Thus, the cost to the borrower of informal loans is much
higher.

4. Higher cost of borrowing means a larger part of the earnings of the borrowers is
used to repay the loan. Hence, borrowers have less income left for themselves

5. In certain cases, the high interest rate for borrowing can mean that the amount
to be repaid is greater than the income of the borrower. This could lead to
increasing debt and debt trap.

6. Also, people who might wish to start an enterprise by borrowing may not do so
because of the high cost of borrowing.

Solution
1. For these reasons, banks and cooperative societies need to lend more.

2. This would lead to higher incomes and many people could then borrow cheaply
for a variety of needs.

3. They could grow crops, do business, set up small-scale industries etc. They
could set up new industries or trade in goods.

4. Cheap and affordable credit is crucial for the country’s development.

Formal and Informal Credit: Who gets what?

1. Majority of the poor household gets loans from informal sector.

2. Majority of rich household gets loans from formal sectors.

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 3. The formal sector still meets only about half of the total credit needs of the rural
people.

4. The remaining credit needs are met from informal sources.

5. Most loans from informal lenders carry a very high interest rate and do little to
increase the income of the borrowers.

6. Thus, it is necessary that banks and cooperatives increase their lending

particularly in the rural areas, so that the dependence on informal sources of
credit reduces.

7. Secondly, while formal sector loans need to expand, it is also necessary that
everyone receives these loans.

SELF-HELP GROUPS FOR THE POOR

Problem
1. poor households are still dependent on informal sources of credit.

2. Banks are not present everywhere in rural India.

3. Even when they are present, getting a loan from a bank is much more difficult
than taking a loan from informal sources.

4. Absence of collateral is one of the major reasons which prevents the poor from
getting bank loans.

5. Informal lenders such as moneylenders, on the other hand, know the borrowers
personally and hence are often willing to give a loan without collateral.

What are Self Help Groups?

1. They organise rural poor, in particular women, into small Self Help Groups
(SHGs) and pool their savings.

2. A typical SHG has 15-20 members, usually belonging to one neighbourhood,

who meet and save regularly.

3. Members can take small loans from the group itself to meet their needs.

4. The group charges interest on these loans but this is still less than what the
moneylender charges.

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 5. After a year or two, if the group is regular in savings, it becomes eligible for
availing loan from the bank.

6. Any case of non repayment of loan by any one member is followed up seriously
by other members in the group.

7. Because of this feature, banks are willing to lend to the poor women when
organised in SHGs, even though they have no collateral as such.

8. 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.

Grameen Bank of Bangladesh

1. Grameen Bank of Bangladesh is one of the biggest success stories in reaching
the poor to meet their credit needs at reasonable rates.

2. Started in the 1970s as a small project, Grameen Bank in October 2014 has
over 8.63 million members in about 81,390 villages spread across Bangladesh.

3. Almost all of the borrowers are women and belong to poorest sections of the
society.

4. These borrowers have proved that not only are poor women reliable borrowers,
but that they can start and run a variety of small income-generating activities
successfully.

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