MONEY AND CREDIT SUMMARY

NAV JEEVAN MISSION SCHOOL

ECONOMICS X

MONEY AND CREDIT

Chapter 04

MONEY

Money is not a recent Phenomenon. It gradually transformed from a medium of exchange to an important Intermediate for purchasing goods and services.

BARTER SYSTEM:

 The barter system was used before the advent of money.

People used to exchange one thing for another in this system.

DOUBLE COINCIDENCE OF WANTS: 

The double coincidence of wants is the major drawback of the barter system.

It can be very difficult to find a person who can fulfil this condition. Suppose you want to barter your Wheat with a Shoe, then you need to find a person who wants to barter his Shoe for Wheat.

Modern Forms of Money

§  Money is a means by which we can get something in exchange.

§  Initially, coins came into use.

§  The coins were initially made of precious metals; like gold and silver.

§  When the precious metals became too precious, ordinary metals were being used for making coins.

§  Paper money or currency notes gradually took place of coins; although coins of smaller denominations are still in use.

§  The currency notes and coins are issued by the government of an authorized body. In India, the RBI (Reserve Bank of India) issues currency notes.

§  On the Indian currency note, you can find a statement which promises to pay the bearer the amount which is mentioned on the currency note.

Advantages of Money:

1. Removes the coincidence of wants.
2. Takes less storage space and is easier to carry.
3. Liquidity of currency is easier.
4. Now-a-days; many instruments are available through which it is not necessary to physically carry the currency.

OTHER FORMS OF MONEY

Deposits with Banks: 

§  Most of the people need only some currency for their daily needs.

§  Rest of the amount is usually kept as deposit in banks.

§  Money which is kept in a bank is safe and it even earns an interest.

§  One can withdraw money from his account as and when required. Since deposit in the bank account can be withdrawn on demand, these deposits are called demand deposits.

One can use a cheque; instead of cash to settle payments. Moreover, one can also buy a demand draft from a bank to make payments.

Credit/Debit Cards: Now-a-days, credit/debit cards are in vogue.

A debit card allows you to make payments from the amount which is lying in your bank account.

A credit card, on the other hand, provides money on credit.

Payment through credit/debit card is done electronically and this removes the need of carrying cash.

CREDIT/LOANS

§  Banks keep a small proportion of their deposits as cash with themselves.

§  This is usually 15% of their deposits as cash.

§  This amount is kept as provision to pay the depositors who may come to withdraw the money on any day.

§   This amount is enough because only a small fraction of people come to withdraw money on a given day.

§  The rest of the amount is used by the banks to give money on credit to people who need the credit.

§  A bank charges interest on the loan which it gives to its creditors.

§  The interest rate charged by a bank on loans is higher than the interest rate given by it on deposits. Thus, interest is the main source of income for banks.

LOAN ACTIVITIES OF BANK.
Bank works as mediator between    the depositors and the borrowers.
Two different credit situations

A.     Credit for Business

B.     Credit for Agriculture.
(a) In the first situation, a person borrows money for Business activities activities with the promise to repay the loan at the end of the year when production work will be completed.

And at the end of the year, he/she makes a good profit from production activities and he/she is able to pay the amount of loan.

Therefore, that person becomes better off than before.
(b) In the second situation, a person borrows money for production activities with the promise to repay the loan at the end of the year when production work will be completed.

And at the end of the year he/she unable to repay the loan due to loss in production. For this term, he/she come under the situation of debt trap. Therefore, that person becomes worse off than before.

 Terms of Credit

§  People often need to borrow money for various purposes.

§  Many businessmen need to borrow to buy raw materials and machineries.

§  Many farmers need to borrow to buy seeds, fertilisers, farm equipment’s, etc.

§  People usually buy vehicles and houses by borrowing from banks.

§  Thus, credit plays an important role in the economy.

Every loan agreement specifies terms and conditions;

§  Regarding the rate of interest.

§  Term of payment.

§  In most of the cases, the banks fix an EMI (Equated Monthly Instalment) for repayment of loan.

COLLATERAL:

§  An asset which is owned by the borrower and is used as a guarantee to a lender until the loan is repaid is called the collateral.

§   Land, house, vehicle, livestock’s, deposits with banks, insurance policy, gold, etc. are examples of assets.

§   If the borrower fails to repay the loan, the lender reserves the right to sell the collateral to obtain payment.

SOURCES OF CREDIT

1.      Loan from Traders

2.      Loan from Banks

3.      Loan from employers

4.      Loan from Cooperatives.

5.      Friends and Relatives

6.      Loan from money lenders

THERE ARE TWO TYPES OF SOURCES OF CREDIT IN AN ECONOMY
(i) Formal sector
(ii) Informal sector

FORMAL SECTOR
In the formal sector, loans from banks and cooperatives are included.

Features of Formal Sector

• As we know that major portion of the deposited money is provided to those people who    are needy of money for economic activities.

§  In India Reserve bank of India is supervised the functioning of loan activities in formal sectors.

§  In India, the rate of interest in informal sector is greater than the rate of interest in formal sector.

§  Rate of interest in formal sector is supervised by the legal authorities.

INFORMAL SECTOR

In the Informal sector, loans from moneylenders, traders, employers, relatives and    friends are included.  In the Informal sector, the rate of interest is supervised by moneylenders, traders, employers       who are provided money.

·         The rate of interest is varying from person to person.

·         There is no organization for supervising loan in informal sector.

·         Lenders can use any method to get back their money from the borrowers.

·         Sometimes, the incomes of the borrowers become less compare than the amount which has to pay due to the high rate of interest.

SELF HELP GROUPS

Self Help Groups (SHGs) are recent phenomena. An SHG is comprised of small number of people; like 15 – 20 members. The members pool their savings. The collection is then utilised to lend small amounts of money which may be required by any of the members. The group charges interest on the loan. The arrangement of loans through Self Help Groups is also known as microfinance because the small amount of loan is involved. An organisation constituted to collect the savings of the poor which is known as self-help group. The aim of the organisation is to lend loan at less rate of interest compared to the rate of interest specified by the money lenders. A self-help group has 15 – 20 members. Savings vary from member to member i.e. Rs. 25 to Rs. 100 depending on the ability of the person to save.

It was the Grameen Bank of Bangladesh which began experimenting with microfinance. The founder of Grameen Bank, MOHAMMAD YUNUS was conferred with Nobel Prize in 2006 for his efforts at improving the lot of the poor.

SHGs have helped immensely in reducing the influence of informal lenders in rural      areas.

Many big corporate houses are also promoting SHGs at many places in India.