GRADE 10 ECONOMICS

MONEY AND CREDIT

❖ The use of money spans a very large part of our everyday life.
❖ Goods are being bought and sold with the use of money. In some of these transactions, services are
being exchanged with money.
❖ For some, there might not be any actual transfer of money taking place now but a promise to pay
money later.
❖ Everyone prefers to receive payments in money and then exchange the money for things that they
want. Take the case of a shoe manufacturer. He wants to sell shoes in the market and buy wheat.
The shoe manufacturer will first exchange shoes that he has produced for money, and then
exchange the money for wheat.
❖ Imagine how much more difficult it would be if the shoe manufacturer had to directly exchange
shoes for wheat without the use of money. He would have to look for a wheat growing farmer who
not only wants to sell wheat but also wants to buy the shoes in exchange. That is, both parties have
to agree to sell and buy each other’s commodities.

Barter System was used before the advent of money

It is based on the principle of double coincidence of wants
Double coincidence of wants means what a person desires to sell is exactly what the other wishes to buy.
So, goods and services are directly exchanged without the use of money.
This has practical difficulties as it imposes severe limitations as what one wants to sell may not be what the
other wants to buy.
Money, on the other hand, provides the crucial intermediate step and eliminates the need for double
coincidence of wants.
A person holding money can easily exchange it for any commodity or service that he wants. And then
exchange the money for things that they want.
With money, it is no longer necessary for the shoe manufacturer to look for a farmer who will buy his
shoes and at the same time sell him wheat. All he has to do is find a buyer for his shoes. Once he has
exchanged his shoes for money, he can purchase wheat or any other commodity in the market.

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

MODERN FORMS OF MONEY

❖ CURRENCY which includes paper notes and coins
But currency does not have any use of its own, other than as a medium of exchange.
❖ It is accepted as a medium of exchange because it is authorized by the government of the country.
❖ In India, the RBI issues currency notes on behalf on the Central government.

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 No individual or organisation is allowed to issue currency.
❖ No individual in India can legally refuse a payment made in rupees as the law legalizes it as a
medium of exchange.
❖ The modern forms of money — currency and deposits — are closely linked to the working of the
modern banking system.

DEPOSITS WITH BANKS

❖ The other form in which people hold money is as deposits with banks.
❖ At any point of time, people need only some currency for their daily needs.
They deposit the extra cash they have with banks by opening a bank account in their name.
❖ Banks accept the deposits and also pay interest on the deposits.
❖ In this way people’s money is safe with the banks and it also earns interest.
People can withdraw the money as and when they require.
❖ Since the deposits in the bank accounts can be withdrawn on demand, they are called demand
deposits.
❖ Demand deposits also offer CHEQUE FACILITY
❖ To use this facility the payer who has an account with the bank, makes out a cheque for a specific
amount in the payee’s name.
❖ A cheque is a paper instructing the bank to pay a sum from the person’s account to the person in
whose name the cheque has been issued.
❖ So payments can be settled without the use of cash.
❖ Hence these constitute money in the world today.

LOAN ACTIVITIES OF BANKS

❖ Banks keep a small proportion of deposits as cash with themselves.
At present banks hold 15% as cash
This is to pay depositors who come to withdraw cash.
❖ Major portion of money is extended as loans for various economic activities.
❖ In this way, banks mediate between those who have surplus funds (depositors) and those who are
in need of these funds (borrowers).
❖ Rate of interest on loans is higher than the interest offered on deposits.
❖ The difference between the two is the main source of income of banks.

TWO DIFFERENT CREDIT SITUATIONS: (case studies on page 43)

• Salim obtains credit for business production needs
• Credit helps him to meet ongoing expenses
• Completes production on time and increases his earnings
• Therefore credit plays a vital and positive role in this situation

• In Swapna’s case, crop failure made loan repayment impossible.

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 • She took another loan for next season’s cultivation
• Production was low and got caught in a debt trap.
• She had to sell part of her land to repay the loan.
• Credit in this case made the borrower’s situation worse.

TERMS OF CREDIT
Every loan agreement specifies an interest rate along with the repayment of the principal.
Lenders may also demand collateral ( security) against the loan.
Collateral is an asset that the borrower owns ( such as land, building, vehicles, livestock, jewellery ) 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 and recover the loan
amount.
Hence TERMS OF CREDIT include
• Interest rate
• Collateral
• Documentation required
• Mode of repayment

LOANS CAN BE GROUPED UNDER TWO HEADS

FORMAL SECTOR LOANS
• Banks
• Cooperatives

INFORMAL SECTOR LOANS

• Moneylenders
• Traders
• Employers
• Relatives & friends

Loans by the Formal Sector

The R.B.I. supervises the functioning of formal credit in the following ways:
❖ It monitors the cash balance of banks
❖ Ensures that loans are given to small cultivators, small scale industries, small borrowers other than
profit-making businesses
❖ Banks have to periodically submit information regarding loans, how much they are lending, to
whom and their interest rates to the RBI
❖ In comparison to the informal sector, the lending rates are lower

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LOANS BY THE INFORMAL SECTOR:
• No supervision
• Lend at whatever interest rates they choose
• Often use unfair means to recover their money
• Much higher rate of interest in comparison to formal sector
• High cost of borrowing puts pressure on the borrower, leaving less money for themselves
• The amount to be repaid maybe greater than the income of the borrower, leading to debt trap
• The high interest rate discourages growth in businesses and launching of new enterprises
• People who might wish to start an enterprise by borrowing may not do so because of the high cost
of borrowing.

Why is cheap and affordable credit is crucial for development?/

Why should banks and cooperative societies lend more?
• A high interest rate discourages growth in businesses and launching of new enterprises
• People who might wish to start an enterprise by borrowing may not do so because of the high cost
of borrowing.
• Banks and cooperative societies should lend more and reduce dependence on informal sources in
the rural areas
• The low interest rate would lead to higher incomes and many people could then borrow cheaply for
a variety of needs. They could grow crops, do business, set up small-scale industries etc. They could
set up new industries or trade in goods.
• This would lead to higher agricultural growth,
• investment in small-scale industries will increase employment
• It will lead to increase in trade
• While formal sector loans need to expand, it is also necessary that everyone receives these loans.
• At present, it is the richer households who receive formal credit whereas the poor have to depend
on the informal sources.
• It is important that the formal credit is distributed more equally so that the poor can benefit from
the cheaper loans

• 85% of loans of poor are from informal sources

• Only 10% of loans of rich are from informal sources
• The rich avail cheap credit from formal lenders while the poor have to pay high rate of interest from
informal sources.
• It is important that formal credit should be distributed equally so that the poor can benefit from
cheap loans.

LOANS FROM COOPERATIVES

❖ Cooperative societies are a source of cheap credit in rural areas.

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 ❖ Members of a cooperative pool their resources for cooperation in certain areas.
❖ Cooperative societies are playing a significant role and share major credit in the growth of rural
sector.
❖ Cooperatives cover more than 97% of Indian villages, some run by its members and some by the
government.
❖ They provide credit to the farmers, a crucial need in farming.
❖ Apart from this, cooperatives help farmers by providing top quality fertilizers, seeds, insecticides,
pesticides etc at reasonable price.
❖ Farmers also get marketing, warehousing facility and transportation support from the
cooperatives.
❖ Several cooperative societies help the poor and marginal farmers with tractors, threshers etc on
rent.

❖ There are several types of cooperatives possible such as farmers cooperatives, weavers
cooperatives, industrial workers cooperatives, etc.
❖ Krishak Cooperative functions in a village not very far away from Sonpur. It has 2300 farmers as
members. It accepts deposits from its members. With these deposits as collateral, the Cooperative
has obtained a large loan from the bank. These funds are used to provide loans to members. Once
these loans are repaid, another round of lending can take place.
❖ Krishak Cooperative provides loans for the purchase of agricultural implements, loans for
cultivation and agricultural trade, fishery loans, loans for construction of houses and for a variety of
other expenses.

WHY ARE THE POOR STILL DEPENDENT ON INFORMAL SOURCES OF CREDIT?

❖ Banks are not present everywhere in rural India.
❖ Getting loans from banks is much more difficult than taking a loan from informal sources.
❖ Bank loans require proper documentation and collateral.
❖ Absence of collateral is one of the major reasons which prevents the poor from getting bank loans,
❖ Informal lenders know the borrower personally and are often willing to advance loans without
collateral.
❖ Borrowers are able to get fresh loans from the moneylenders without paying the previous loans.
However, moneylenders charge very high rates of interest, keep no records of transactions and
harass the poor borrowers.

SELF-HELP GROUPS
SHGs is a new way to organize the poor, especially women, in rural areas and provide loans.
❖ A typical SHG has 15 to 20 members, usually belonging to the same neighborhood.
❖ They meet regularly and pool in their savings.
❖ Saving per member varies from Rs. 25 to Rs. 100 or more.
❖ Members can take small loans from the group itself to meet their needs.
❖ The group charges a low rate of interest on the loans.

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 ❖ After a year or two, if the group is regular in savings, it becomes eligible for availing loans from the
bank.
❖ Loan is sanctioned in the name of the group and creates self-employment opportunities for the
members.
❖ Small loans are provided for releasing mortgaged land, buying seeds, fertilisers, housing materials,
sewing machines, cattle etc.
❖ Most of the important decisions regarding the savings and loan activities are taken by the group
members.
❖ The group takes decisions regarding the loans to be granted- the purpose, amount, interest,
repayment schedule etc.
❖ Also, the group is responsible for the repayment of the loan.
❖ Any non-payment of loan is followed up seriously by the other members.
❖ Because of shared responsibility, banks are willing to lend to the poor women when organized in
SHGs, even though they do not have collateral.
❖ SHGs have helped rural women to become self-reliant. The regular meetings provide opportunities
to discuss and act upon social issues like health, domestic violence, literacy etc.

Microfinance refers to an array of financial services, including loans, savings and insurance, available to
poor entrepreneurs and small business owners who have no collateral and wouldn't otherwise qualify for a
standard bank loan.

Muhammad Yunus is a Bangladeshi social entrepreneur, banker, economist, and civil society leader
who was awarded the Nobel Peace Prize in 2006 for founding the Grameen Bank and pioneering
the concepts of microcredit and microfinance.
These loans are given to entrepreneurs too poor to qualify for traditional bank loans.
In 2006, Yunus and the Grameen Bank were jointly awarded the Nobel Peace Prize “
for their efforts through microcredit to create economic and social development from below".