Money and Credit (1)

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Chapter 3
Money and Credit
 Double Coincidence of Wants

It refers to a situation wherein what a person wishes to sell is exactly the same as that the
other person wishes to buy. This is a concept in the barter system in which goods are
exchanged directly without the use of money.
 Money
It is a medium of exchange.
 It eliminates the double coincidence of wants.
 Forms of Money
 Ancient period: Barter system: Grain, cattle, goods etc. were used as money.
Limitation: a) Double coincidence of wants.
b) difficult to measure exact value of goods.
 Medieval period: Metallic coins of gold, silver, copper and lead were
used as money.
Limitation: a) Minerals are precious so difficult to find.
b) It is bulky so difficult to carry.
c) Production cost is higher than the value of a coin
 Modern period: Paper currency and coins are used as money.
 Function of Money/Currencies
 Medium of Exchange
 Measure the value of Goods and services.
 Store of value
 It is the base of credit(loan)
 Delayed/postponed payment
 Means of saving
 Money in India
 Rupee is the Indian currency. (Started by sher shah Suri)
 Money has value because it has got the sanction of the government.
 Reserve Bank of India (RBI) is authorized to issue currency notes on behalf of the
Government of India.
 Bank Deposits
 People deposit their money in banks by opening a bank account.
 Banks keep the money safe and also provide interest on the deposited amount of
money to the depositors.
 The deposited money can be withdrawn from banks as and when required on
demand. Hence, bank deposits are also called demand deposits.
 Bank deposits also facilitate easy transfers of money through cheques, demand drafts
or internet banking.
 Cheque: A cheque is a document issued by an account holder to the bank,
instructing the bank to pay a specific amount from the issuer’s account to the person
in whose name the cheque has been issued.

 Loans
Banks provide loans to people at some interest rate.
 Banks keep only 15% of their total deposits as cash to meet the day-to-day
withdrawal demands.
 Rest of the cash is extended as loans to those who need it (borrowers) at a specific
rate of interest.
 The interest provided by banks to depositors is less than the interest charged by banks
from borrowers on loans. This difference is the main source of income of banks.
 Banks provide housing loans, vehicle loans, farm loans, education loans, personal
loans etc. to meet the specific requirements of borrowers.
 Debt Trap
It is a situation in which a person is caught in the vicious cycle of debts. He/she takes
loans for meeting his/her requirements and on being unable to pay back the loan, takes a
fresh loan to repay the old loan. This leaves him/her indebted all through his/her life.
 Collateral
 It is an asset owned by the borrower such as land, building, vehicle, livestock etc.,
which is kept with the bank as a guarantee against a loan until the loan is repaid.
 In case of failure in repaying the loan, the bank would have the right to sell the
collateral to recover the loan amount.
 Terms of Credit
 Loan amount
 Interest rate
 Collateral security
 Proper Documentation
 Time period
 Mode of payment
 Loans from Cooperatives
 Cooperative societies are small scale organizations formed by people themselves.
 The members of cooperatives pool their resources in the account of the cooperative
and then extend loans to those in need.
 Cooperatives also take loan from banks.
 There are several types of cooperatives such as krishak cooperatives, weaver’s
cooperatives, industrial workers’ cooperatives etc.
 Formal Sector Loans

 These consist of loans from banks and cooperatives
 These loans are supervised by the RBI
 Proper Documentation
 Collateral Required
 Not for poor people
 Not available in rural areas
 Rate of interest is not very high

 It comprises 52% of the total loans given in the country
 Informal Sector Loans
 These consist of loans from moneylenders, landlords, traders, relatives and friends
etc.
 They are not under the control of the RBI
 The rates of interests are exorbitant (very expensive)
 No proper Documentation required
 No collateral required
 Loan available on mutual trust
 It comprises 48% of the credit in the country
 It is mostly taken by poor rural households
 Self-Help Groups
 SHGs are small groups of people who pool their savings and lend money to those
members who are in urgent need of money.
 It usually consists of 15–20 members
 The rate of interest charged on the loan is very low.

 Saving per member varies from Rs 25 to Rs 100 or more, depending on the ability
of the people to save
 After a year or two, if the group is regular in savings, is also eligible for availing
bank credit.
 Loan is sanctioned in the name of the self-help group and is meant to create self-
employment opportunities for the members.
 These groups are created with the purpose of creating self- employment
opportunities for the members.
 Thus, the SHGs help borrowers to overcome the problem of lack of collateral.
 SHGs of women have been a great success in India in making women self-reliant.
 Grameen Bank
 Started in 1970s as a small bank in Bangladesh
 Formed by Professor Mohammad Yunus who was awarded the Nobel Peace Prize in
2006.
 Most borrowers are women
Note: In India Credit related data is collected by NSSO (National sample survey Organisation)

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 Double Coincidence of Wants

in whose name the cheque has been issued.

 Formal Sector Loans

 Rate of interest is not very high

 The rate of interest charged on the loan is very low.

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