NCERT Notes Class 10 Social Science Economics Chapter 3 Money and Credit
Chapter 3 Money and Credit NCERT Notes
Chapter Name | Money and Credit Economy Notes |
Class | CBSE Class 10 |
Textbook Name | Understanding Development Class 10 |
Related Readings |
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Money as a medium of exchange
- In our everyday life, we see several transactions happening all around us; here, the goods are being bought or sold using money. In some cases, services are exchanged with money.
- Money is an economic unit recognized as a medium of exchange for transactional (buying or selling) purpose in an economy.
- This system of transactions with the use of money was developed to replace the bartering system. It helps to overcome the shortcomings of double coincidence of wants.
- The double coincidence of wants is an omnipresent problem in a barter economy, where to make a transaction, each party must have something that the other party wants. For example, if a person wants to sell shoes and buy wheat without money, he will have to seek a farmer who sells wheat and wants to buy his shoes in exchange. That is, both parties must willingly agree to buy and sell each other’s commodities.
- Using money by providing crucial intermediate steps will eliminate the need for double coincidence of wants. Thus, Money acts as an intermediate in the exchange process, and it is called a medium of exchange.
Modern forms of Money
During early age, i.e., before introducing coins or currency notes, other means were used for exchange and settlement of transactions, like in India, grains and cattle were used as money. After that, metallic gold coins, copper, and silver were used as money that lasted till the last century. These coins need precious metals for production. Moreover, grains and cattle cannot be used as standard overall places; this led to modern forms of money.
The modern forms of money are:
Currency
- Currency includes paper notes and coins. The modern currency does not have use of its own, unlike grains and cattle.
- It is accepted as a medium of exchange as the country’s government authorizes its usage.
- In India, the central government has given the responsibility to the Reserve bank of India to issue currency notes on its behalf. It would be illegal by law for any other individual to issue these currency notes.
- Moreover, the Indian government has legitimized the use of “Rupee” as currency in the country. No person can decline payment made in the rupee. Thus, Rupee is widely accepted as a medium of exchange.
Deposits with Banks
- Bank deposits are also a form of the modern economy. In this, people can open a bank account and deposit their extra cash where it remains safe, and they also receive some amount as interest on their deposit. There is a provision to withdraw money on their demand whenever required. Thus these deposits are also called demand deposits.
- Demand deposits have another key feature which imparts important characteristic of money (like portability, divisibility, etc.). It is payment utilizing cheque.
- A cheque is a paper instructing the bank to deposit or transfer a specific amount of money from one person’s account to other(person in whose name cheque has been issued).
- This facility enables people to settle payments without using cash.
The modern forms of money, currency, and deposits are intricately linked tothemodern banking system’s working.
Loan activities of Bank
- The majority of people deposit their money in banks. The banks only keep a small portion of these deposits with themselves. It is used when the depositors come to withdraw their money.
- The other major portion of the deposits is used to offer loans to borrowers.People need loans for various economic activities like buying a house, vehicle loans, etc.
- The Banks utilize the deposits to meet the loan requirements of the borrowers.
- Thus, Banks act as a mediator between the depositors (those who have surplus funds) and Borrowers (those who need funds).
- These banks charge a higher rate of interest on the loan amount.
- The bank’s main income source is the difference between the Paid amount by borrowers and the actual loan amount.
Two Different Credit Situations
Credit (Loan): It is an agreement in which a borrower receives money, goods, or services from a lender for now and promises to return the resources or repay the lender in the future.
There are two different types of credit situation:
First Situation
- A person acquires credit to meet the demands and supply of production of a company. This obtained credit helps the person meet the ongoing production expenses on time and thereby increases the income through profit. Here credit plays a vital and positive role.
Second Situation
- A person obtains credit for manufacturing activities, but due to certain unpredictable conditions, he/she cannot carry out manufacturing activity and is at a loss. Thus, that person cannot repay the loan, and debt grows over the year into a huge amount. This pushes the person into the debt trap. In such a case, credit worsens the situation.
Example: Mostly in a rural area, there is a high demand for loans for crop production. Credit is required for the purchase of seeds, pesticides, fertilizers, equipment, etc. There is a minimum gap of 3-4 months between these resources’ input and the output of crops for farmers. Farmers take a loan at the beginning of the year and repay it after harvest. The repayment of a loan is mainly dependent on income from farming. There is a high risk involved in crop production as it depends on the climate and other factors, so if the crop fails, the farmer would be unable to repay the loan and will fall into a debt trap or will have to sell a part of his land to repay the loan. This way, credit can worsen a person’s situation.
Thus, credit can be beneficial and detrimental, depending on the risks involved in the situation.
Terms of Credit
There are various terms and conditions to be followed before obtaining a loan from a lender.
Interest rate
- It is the principal or amount charged by the lender for the use of its money. In every loan agreement, the interest rate is specified, which the borrower must pay to the lender and the principal amount’s repayment.
Collateral
- It is an asset of the borrower such as land, building, vehicle, etc., that is used as a guarantee or security against loans.
These assets are kept as a security with the lender for a period until the loan is repaid.
The lender has the right to sell the asset or collateral if the borrower fails to repay the loan.
Interest rate, collateral and documentation requirement, and there payment mode together cover the terms of credit. It may vary fromone credit arrangement to another.
Formal Sector Credit in India
There are various sources for procuring loans, and these sources can be grouped as Formal sector loans and Informal sector loans.
- The formal sector of credit includes Banks and cooperative societies. Simultaneously, the Informal sector constitutes landlords, moneylenders, traders, relatives, friends, and other sources of credit.
- The Reserve bank of India governs the functioning of formal sources of loans. The RBI monitors the cash balance of banks.
- The RBI assures that banks provide loans to small cultivators, small-scale industries, etc., at cheap rates and not only to profit-making businesses and traders.
- The banks must periodically submit data about their interest rate, borrowers’ information, etc., to the RBI.
- Nobody supervises the informal sector; here, the loan activities are only driven by profit, and they charge a much higher interest rate. A higher interest rate leads to the debt trap situation as the borrower spends more money to repay the loan and is left with no money for himself.
- It is observed that almost 85 percent of poor households in urban areas take loans from informal sources at higher interest rates. In comparison, 90 percent of rich households avail cheaper loans from formal sources.
- Because of this reason, the banks and cooperatives must make provisions to provide loans at cheaper rates in rural areas, which would enable people to set their own businesses, new industries, grow more crops, etc.
- The formal sector also needs to expand, and it should be accessible to everyone. Cheap and affordable credit is crucial for the development of the country.
Self help Groups for the Poor
- Poor households are majorly dependent on informal sector credits. This is because Banks are not available in rural areas. Moreover, banks require proper documentation and collateral for lending a loan. The absence of collateral prevents the poor from getting a loan.
- On the other hand, moneylenders willing to give loans to the poor at a much higher rate without any collateral. They keep no data of the transactions and harass the poor.
- To avoid this situation, people have come up with the idea of Self-help groups for the poor.
- The idea is to organize rural poor, particularly women, into small Self Help Groups(SHGs) and pool (collect) their savings.
- SHG groups typically have 15-20 members who meet and save 25 to 100 rupees per person, depending on their ability to save.
- The group lends loans to its members at a comparatively low-interest rate than the moneylender without collateral.
- If the group is regular in savings, it becomes eligible to receive a loan from banks.
- The organization grants loans to its members and provides self-employment opportunities to its members. For example, small loans are provided to release mortgaged lands, buy seeds, fertilizers, raw materials, etc.
- The group decides the activities regarding the loan, and it is the group’s responsibility for the repayment of the loan. In case any member fails to repay the loan, it is followed by other group members.
The SHGs support borrowers and overcome the issue of collateral. They provide timely loans with a cheaper rate of interest. SHGs are the building blocks of the organization of rural poor. They support women empowerment and provide a platform to spread awareness on social issues like health, nutrition, domestic violence, etc.