MONEY AND CREDIT

class -10 Economics Chapter-3

Money as a medium of exchange
Money is an item which is used as a medium of exchange for goods
services. money works as an intermediary.
Money acts as an intermediate in the exchange process, it is called a
medium of exchange.
A person holding money can easily exchange it for any commodity or
service that he or she might want.
The use of money spans a very large part of your everyday life.
Barter system
Barter system refers to a system in which goods and services are
exchange with goods and services without the use of money.
Double coincidence of wants
What a person desire to sell is exactly what the other wishes to buy.
Modern forms of money are
Before the introduction of currency, Indian used grain and cattle as
money.
Thereafter came the use of metallic coins - gold, silver, etc.
The modern forms of money include currency - paper Notes and coins.
Currency
It is accepted as medium of exchange because the currency is authorised
by govt. of the country.
In India, Reserve Bank of India (RBI) issue currency on behalf of central
government.
The rupee is widely accepted as a medium of exchange in India.
Deposits in Bank
Banks accept the deposits and also pay an amount as interest on the
deposits.
the deposits in the bank accounts can be withdrawn on demand, these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 person’s account to the person in whose name the cheque has been
issued.
payment can be made by cheque instead of cash.
The other form in which people hold money is as deposits with banks.
Deposits with banks is also form of money.
Loan activities of Banks
bank works as a mediator between the depositor and borrowers.
Banks keep only a small proportion of their deposits as cash with
themselves.
Banks use the major portion of the deposits to extend loans.
Banks charge a higher interest rate on loans than what they offer on
deposits.
Banks hold about 15% of their deposits as cash.
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 1 examples which help you to understand how credit works
In First situation ,a person takes loan for production activities. At the end
of year he makes a good profit from production and able to pay the loan
.So, Credit(loan) plays a positive role in this situation.
In second situation ,a person takes loan but at end of year he is unable to
repay the loan. due to loss in production. So, Credit(loan) plays a negative
role in this situation.
Note - Some times credit , pushes the borrower into a situation from which
recovery is very painful.
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.
Interest rate, Collateral and documention requirements and mode of
repayment together compromise is called Terms of credit.
In addition, lenders also demand collateral (security) against loans.

3
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.
Formal sector credit in india
These are the loans from banks and cooperatives.
The Reserve Bank of India supervises the functioning of formal sources of
loans.
Rate of interest is an yearly basis.
It might require collateral for the credit.
It may reduce the debt trap.
Banks have to submit information to the RBI on how much they
are lending, to whom, at what interest rate, etc.
Informal sector of credit
These are the loans from moneylenders, traders, employers, relatives and
friends, etc.
They do not work any government organisations.
They do not follow any rules and regulations.
Generally rates of interest is monthly basis.
Charge much higher interest on loan.
There is no one to stop them from using unfair means to get their money
back.
why people in rural areas prefer informal sector of credit ;
banks are not present everywhere in rural areas whereas informal are
easily available in villages.
Getting loan from Bank requires collateral which most of the poor people
does not possess.
informal lender provide loan to the poor people without any collateral.
SHG (self help group)
SHG are small groups of poor people which promote small savings among
their members. SHG has 15-20 members, usually belonging to one
neighbourhood, who meet and save regularly.
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.

4
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 isues such as health, nutrition, domestic violence, etc.
Grameen bank of Bangladesh
Grammen bank of Bangladesh is one of the biggest Success of SHGs.
It has over 9 million member in about 81600 village spread across
Bangladesh.
Prof. Muhammad yunus was the founder of grammen bank.
He receive noble peace prize in 2006.