MATHERRIFIC (AN ACADEMY OF OLYMPAID)

SST: ECONOMICS NOTES CH: 3 MONEY AND CREDIT

Why should we study about money?

• All of us wants a good income in our future which is measured in terms of money.
• Money is the means through which we measure how much we earn, we spent, we lend, we
borrow, we save, we donate.
• To earn economic wealth managing money is no way less important than earning.
• Studying about money and credit enable us to make wise economic decision like allocation,
investment, savings, expenditure, etc.

Emergency of exchange

• With the growth of civilisation needs of people started increasing.

• People who were expert in producing some goods started taking it as a profession.
• They started collecting other goods that they need from other producer in exchange of the
goods produced by them.
Which lead to development of “BARTER”

BARTER SYSTEM:- The system of direct exchange in which commodities without using any medium
of exchange.

Main features of Barter

• It is the oldest exchange system.

• Goods or services are exchanged/ swap for other goods or services directly.
• There was no common measure of value.
• No money or other medium of exchange was used.
• Double co- incidence of wants is an essence of barter system.

Advantage of Barter:-

• It is the direct exchange system and therefore need could be satisfied immediately.
• No medium of exchange is required.
• Low transaction time is required which helps the people to avoid the risk of change in value
over time.

Limitations of Barter:

• Need of double co- incidence of wants.

• Lack of standard measure of value.
• Problem of divisibility.
• Problem in storing value.
• Problem of transferring value.
• Deferred payment was not possible.

Commodity Money:- The most primitive type of money is commodity money. Some useful
commodity that is in general demand is used as an exchange medium and may serve both as a
means of payment and a measure of value. Ex- various commodities have historically served as
money – cattle, tobacco, sugar, grains, nails, shells, hides, metals, etc. but the transaction is still
essentially a barter trade of one good or service for another good.

Limitations of Commodity Money

• Lack of standard measure of value.

• Problem in storing value.
 • Problem of transferring value.
• Deferred payment is not possible.

Cattle Money:- To overcome the problem of transfer of value with commodity money people started
using cattles as money. Domestic animals having common utility were used as medium of exchange.
These animals were known as cattle money.

Limitations of cattle money:-

• Need of double coincidence of wants.

• Lack of standard measure of value.
• Problem in storing value.
• Problem of transferring value.
• Deferred payment is not possible.
• Problem of divisibility

Metallic Money:- Some precious metals like gold, silver, etc., having common utility were started
using as medium of exchange which were known as metallic money. These were easy to store and
not get damaged. Conveniently carry from one place to another. Dividable in smaller parts.

Way to modern coins:-

• Started adding symbols to express value. It gives a standard measure of value.

• Standardized with weight, size, and colour.
• Old precious metal were replaced with less costly metals.

Money: Anything which is used as a medium of exchange, store of value, measure of value, and
standard of different payments.

Money can be anything

• Has purchasing power.

• Used as medium of exchange.
• Used to measure value of any goods or services.
• Used to transfer value from one person to another person or one place to another.
• Used to store value for future use.
• Used as a standard of deferred payment.

Function of Money

• Medium of exchange
• Store of value – It is safe and accessible store of wealth as it maintains its purchasing power.
• Measure of value.
• Transfere of value.
• Standard of deferred payment.

Money in India

• the coins and paper currency of paise and rupee are generally accepted as medium of
exchange or money in India.
• Paper currency note and metallic coins for denomination of Rs.2 and above are issued by
RESERVE BANK OF INDIA in permission of Finance Minister of the central government. At
the present it issues coins and notes of Rs. 2, 5, 10, 20, 50, 100, 200, 500 and 2000.
• Rs 1 and its subsidiaries are issued by the Ministry of Finance. It issues coins of Rs. 1 and 50
paise.

Other name of modern currency

• Symbolic or token money:- As the currency notes and coins have no or very less intrinsic
value but represents a higher value, therefore they are called Token money.
 • High powered money:- Currency notes and coins are called high powered money because
they represent higher value than their actual value.
• Legal tender money:- The rupee notes and coins in India are called legal tender money
because they poses a legal value and no one can legally refuse any payment made through
these.

BANK:- Bank is a financial institution who deals with money and credit as its regular course of
business. It accepts deposits from the depositors and grant loans to the needy borrowers.

Function of Bank

• Accepting deposits.
• Granting loans.
• Providing safety to valuables of customers.
• Transferring funds from one place to another for customer.
• Accepting payment for customer.
• Making payment on behalf of customer. Paying electricity bill / insurance premium etc.

Main function of Bank: Depositors and Borrower

Demand deposit: Withdrawable at any time on demand. It includes deposit in current account and
savings.

Time or term deposit: Withdrawable after a certain period of time. It includes deposit in fixed deposit
account, and recurring deposit account.

FOUR MAJOR TYPES OF DEPOSIT ACCOUNTS

Current Deposit Account:

• No restriction in deposit.
• No restriction in withdrawable.
• No interest is paid by the bank on deposit.
• Main purpose of opening such account is to provide safety to customer cash.
• Rich businessman and organisation opens such accounts.

Saving Deposit Account

• No restrictions in deposit.
• Withdrawable is possible at any time subject to some restrictions.
• Low rates (3-4 %) of interest is paid by the bank on deposit.
• Main purpose of opening such accounts is savings and meeting uncertain urgencies.
• Small businessman and people with low or moderate income opens such accounts.

Recurring Deposit Account

• Fixed amount is deposited at a fixed interval for a fixed period.

• Withdrawable is only on maturity.
• Good rate of interest is paid by the bank on deposit.
• Main purpose of opening such account is capital formation and savings.
• People with regular income usually opens such accounts.

Fixed Deposit Account

• Fixed amount is deposited for a fixed period.

• Withdrawable is only on maturity.
• Highest rate of interest.
• Main purpose of opening such account is to earn interest and save for certain future needs.
• People having no other investment options and with some certain future needs deposits here.
Demand Deposit is a Modern form of Money

• Money in demand deposit can be withdrawn at any time through cheque, ATM, etc.
• It can be used to make payment or purchase at any time through cheque, Debit card, Net
banking, etc.
• It has purchasing power.
• Anything having purchasing power is money.
• Therefore demand deposit is money.

Modern form of money

• Money is anything that has purchasing power.

• Demand deposit has purchasing power. (as it can be used to make payment or to purchase)
therefore, demand deposit is money.
• Money = Purchasing power.
• Demand deposit = Purchasing power = Money.

Cheque: It is a written document with which a depositor orders his banker to pay a certain amount to
himself or to the bearer or to a certain person.

Features of Cheque

• Cheque is a written document prescribed form provided by bank.

• It is written by a depositor to his banker.
• It caries an order to pay a certain sum of money from the deposit.
• It is a modern form of money as it can be used to make payment.

Essential components of a cheque

• Signature of depositor.
• Name of payee. (self/bearer/any third party)
• Amount must be specific and written in both words and numbers.
• Date of drawing or making
• Account number of the depositor.

Card money / Plastic money: Debit card, Credit card, Smart card, Health card, etc.

Digital cash: Net banking, Mobile banking, etc.

Bank money: Cheque, Demand draft, Bankers cheque, etc.

Credit: Credit is an arrangement in which ones financial need is satisfied with the money or resource
of another with a promise to repay in future. A promise to pay in future cash, goods, services.

Role of credit in development

• Credit makes proper use of excess money of the depositors by channelising it to a profitable
investment. In this way it maximizes the use of countries worth.
• Enables the borrower to invest more than their resources available with them.
• Maximizes the use of resources by providing working capital.
• Helps the lenders to earn interest from their savings.

Terms of credit: Different conditions in which the borrower and the lender agreed before granting or
taking a loan. It includes rate of interest, mode of repayment, collateral, documentation required etc.

Sources of credit

• The individual or organisation who grants loan.

• Banks
• NBFIs
 • Cooperatives
• Family members
• Friends
• Traders
• Money lenders

Formal sources:

• Controlled by RBI.
• Reasonable and justified rate of interest.
• Granted for productive purpose only.
• More documentation required.
• Legal proceedings followed to recover loan amount if the borrower fail to repay.

Informal sources:

• Not controlled by anyone.

• Mostly high and unjust rate of interest.
• Granted for any purpose.
• More or less documentation required.
• Lender can take any measure to recover loan if the borrower fails to replay.

Advantages of formal sources of credit

• Low rate of interest.

• Adopt judicious policy to recovery of loan.
• Grant loans only for productive purpose and chances of failing in debt trap is less.
• Help the borrowers for effective utilisation of loan amount and promote development.
• Interest rate is fixed considering the prevailing market and economic condition and therefore
the risk of borrowers are less.

Limitations of formal sources of credit:

• Grants only secured loan. So, the people without proper collateral cannot borrow.
• Long progress and high documentation.
• Less autonomy in utilisation of fund.
• Difficult to get loan to meet small financial needs.
• It grants loans only for projects that are productive in their eyes.
• Located at far from the borrowers particularly in rural areas.

Informal sources of credit:

• Very easy process and instant credit.

• Less or no documentation.
• Full or high level of autonomy in utilisation of fund.
• Free to fix the loan amount and time and mode of repayment.
• Loans are granted to meet all kind of financial needs.

Limitations of informal sources of credit

• High rate of interest.

• Though and unnecessary interference in utilisation of fund.
• Unjust and unethical means of recovery of loans if the borrower fails to repay.
• Most grants loans for unproductive purposes, which is detrimental to the interest of the
borrower as well as the economy.

Do credit is always beneficial?

Credit sometimes may be a burden for the borrower and may lead to debt trap. Credit can be a
burden mostly in the following circumstances.

1. If borrowed at a very high rate of interest.

2. If borrowed money used for unproductive purpose.
3. If invested in a business with high risk of failure.
4. Delay in repayment of loan increases the burden as the amount grow in cumulative interest.
5. Failure to repay the loan may cause charge on the property of the borrower which has been
kept as security against the loan.
6. Taking fresh loan to repay the previous loan and fall in debt. trap, recovery from which
becomes very difficult.

Status of lending and borrowing in India

• In India both formal and informal sources of credit is working simultaneously.

• Major part of the formal sector lending goes to the large industrial sector.
• Small borrowers like small farmers, labour class and small arcticians and businessmen, etc.
mostly borrows from informal sector.

Problem of borrowing from informal sector

• High rate of interest.

• Though conditions for repayment.
• Undue and unnecessary interference in utilisation of fund.
• Unjust and unethical means of recovery of loan if the borrower fails to repay.
• Failure to repay loan amount may lead to loss of property and further detoriation of economic
conditions.

Why small farmers borrow from informal sector?

• Hesitation to go to the bank.

• Illiteracy.
• Lack of awareness.
• Lack of collateral.
• Borrowing for unproductive purposes.
• Inability to fulfil documentation needed.
• Poor accessability to banks.
• Easy accessability to money lenders.

Is it important to protect the borrower of informal sector?

• Majority of the borrowers of the informal sector are poor who need financial protection.
• To protect the borrowers from the exploitation of the speculative money lenders.
• Informal sector lending and the interest earned on it is not taxed and therefore these are black
money.
• This often leads to conflict between borrower and the lender which sometimes creates critical
law and order situation.
• Unproductive loans can be used to finance illegal business.

Measures to protect the borrowers of informal sector

• Increasing the accessibility of formal sector lending by expanding banking network.

• Easy and liberal documentation.
• Flexible (size or duration) loan arrangement.
• Reserved and compulsory lending for rural and small scale industry.
• Awareness cappaigning.
Co – operative Society: organisation of people who join for mutual help. Development of the
members is the main purpose not earning profit. Registered under cooperative societies act. Minimum
10 members are required to form a co – operative.

Types of cooperative

• Farmers cooperative society.

• Producers cooperative society.
• Weavers cooperative society.
• Customers cooperative society.
• Cooperative credit society.

Role of cooperative society in capital information: cooperative accumulates its capital with the
contribution of members. Sometimes they takes loans from the banks and NBFIs in the name of
cooperative and use the fund either in collective investments or grants loans to the needy members of
the society. They charges a low rate of interest as their motive is not to earn profit but the
development of economic condition of its members.

Self Help Group (SHG)

• It is a small group of 10 – 20 people belonging from the same locality.

• The main purpose of such group is to help its members for their economic wellbeing.
• They either carry on some collective business or creates a fund to lend to the needy
members.
• Government encourages such groups by arranging bank loan at subsidised rate of interest.

Origin of SHG: Concept of SHGs developed in Bangladesh. “GRAMIN BANK OF BANGLADESH” is

the biggest success story in reaching the poor to meet their credit needs at reasonable rates through
the idea of SHG. Most of the borrowers are women and belong to poorest section of the society.

The idea is the Brain Child of (developed by) renowned economist “Prof. Mohammed Yunus” recipient
of noble prize for peace in 1996.