Economics Chapter 3

Money and Credit
Barter system- It is a medium in which goods or services are exchanged directly

also called ‘Double coincidence of wants’
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Advantage of Barter system Disadvantage of Barter system
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Easy Exchange Issues of Double coincidence of wants
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Instant Exchange Difficulties in storing value
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Limited Production Problem of measurement of value
Money acts as an intermediate in the exchange process
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- Medium of exchange
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Modern forms of Money

- Medium of exchange in transactions
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Currency (Why do we accept money?)

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- Paper notes and coins

- Reserve bank of India issues currency notes on the behalf of the central
government. (No other person can issue it)
- No one can refuse payment made in rupees to settling transactions
- Money is authorized by the government
Deposits with Banks
- People deposit extra cash with bank in their name
- Can be withdrawn on demand→ demand deposits
- Demand deposits offer the facility of cheque: A paper instructing the bank to
pay a specific amount from the person’s account to the person in who's the
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cheque has been issued
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- Banks accept the deposit and also pays an amount of interest on the deposit
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Loan activities of banks
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1. Banks keep a cash reserve
- Bank holds about 15% of the deposit as cash to pay to the depositors who
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might come to withdraw money from the bank any day
- Major part is used to extend the loan
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- Banks mediate between those who have extra funds (depositors) and those
who are in need of funds (borrowers)
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Two different Credit situations
Credit- An agreement in which the lender supplies the borrower with money, goods,
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or services in return for the promise of future payment
1. Credit (loan) plays a positive role when the borrower is able to return the
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loan amount on time and also made some profit with the use of that money.
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For example, Salim, a shoe manufacturer took a loan from different sources to
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complete the order of 3000 pairs of shoes. In the end, he delivered the order,
made a profit, and repaid the loan.
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2. Credit pushes the borrower into a situation from which recovery is very
painful.
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For example, a small farmer Swapna took a loan for crop cultivation but due to
being hit by pests, her crops were destroyed. So she took another loan for
spraying pesticides, but the production was not enough to repay the loan. So
she was caught in debt-trap.
Terms of Credit
All those terms and conditions which are agreed upon by the borrower and
lender
● Collateral- Is an asset which the borrower owns. [land, building, vehicle,
livestocks, deposits with banks] and uses this as a guarantee to a lender
until the loan is repaid
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- Documentation required, collateral, mode of repayment and interest rate
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together comprises terms of credit.
- Terms of credit may vary depending on the Use of it nature of the lender and the
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borrower.
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Formal Sector Credit in India
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RBI Supervision- Formal Sector and Credit

● Cash reserve- Banks maintain a minimum cash balance out of the deposits they
receive
● Not only profit making business get loan- banks give loans not just to
profit-making businesses and traders but also to small cultivators, small scale
industries, to small borrowers etc
● Banks have to submit information to the RBI on how much they are lending, to
whom, at what interest rate, etc
● Interest rate
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Informal Sector
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● Lenders use unfair means to get their money back
● Large part of earnings is used to repay the loan (Dept Trap)
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Cheap and affordable credit is crucial for the country’s development
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● More lending would lead to higher incomes and encourage people to invest in
agriculture, engage in business and set up small scale industries.
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● Cheap credit means more income would be left with the borrower to reinvest
rather than return as interest. This leads to acceleration of economic activity.
● Cheap credit would also allow weaker sections of society to enter formal sector
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of lending and rid them of exploitation at the hands of informal moneylenders.
Thus, it may improve the economic condition of the poor and landless.
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Who gets what?

- Majority of poor household gets loans from informal sector.
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- Majority of rich household gets loan from formal sector.

Reason
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- Formal sector still only meets about half of the total credit needs of the rural
people (Collateral, required documentation are not there, lack of knowledge)
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Solution
- Banks and cooperatives increase their lending in rural areas, so that the
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dependence of informal source of credit reduces

- Necessary that everyone receives these loans
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Self-help groups
- Self-Help Groups were formed to address these issues (SHGs).
- Small groups of poor people who encourage their members to save small
amounts of money.
- A typical SHG includes 15–20 members who meet and save on a regular basis,
usually from the same neighbourhood
- They pool their savings, meet and save regularly, members can take loans from
the group
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Advantages of Self Help Group (SHG):

● It assists borrowers in overcoming the lack of collateral issues.
● SHGs are the foundations of the rural poor's organisation.
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● People can receive loans on schedule and at a fair interest rate for a
number of objectives.
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● It assists women in becoming financially self-sufficient.

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● The group's frequent meetings give a forum for discussing and taking
action on a variety of social concerns such as health, nutrition, domestic
violence, and so on.
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Grameen Bank of Bangladesh- Muhammad Yunus

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Money and Credit

Barter system- It is a medium in which goods or services are exchanged directly

Money acts as an intermediate in the exchange process

Modern forms of Money

Currency (Why do we accept money?)

- Paper notes and coins

or services in return for the promise of future payment

RBI Supervision- Formal Sector and Credit

Who gets what?

- Majority of rich household gets loan from formal sector.

dependence of informal source of credit reduces

Advantages of Self Help Group (SHG):

● It assists women in becoming financially self-sufficient.

Grameen Bank of Bangladesh- Muhammad Yunus

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