Money & Credit
In the absence of money we would have rely on the double coincidence of want, the transaction in absence of money is known as Barter System .
Double coincidence of wants-What a person desires to sell exactly , what the other wishes to buy
Barter System-A system where goods are directly exchanged without the exchange of money
Money as a medium of exchange
Economy with Money-Eliminate the need for double coincidence of wants
Money-Acts as an Intermediate(money as a medium of exchange) in the exchange process
Currency-Modern form of Money (paper notes and coins)
Issue
- Modern currency is not made of precious metal such as gold , silver, & copper
- Unlike grain & cattle , they are neither of everyday use
- The modern currency is without any use of its own
Fiat value No Intrinsic value
Then why it is accepted as medium of exchange ?
Because it is authorised by the government of the country
Authorised by the government of the country
- The Reserve bank of India issues currency notes on behalf of the central government
- No other individual or organisation is allowed to issue currency
- No Individual in India can legally refuse a payment made in rupees
Deposits with Banks
- Deposits with banks people have → a type of money
Extra Cash→People deposit it with bank (Bank account )
- Banks pay an amount as Interest on the deposits
- People’s money is safe
- People also have the provision to withdraw the money as and when they require
→Demand deposits offer another interesting facility
Cheque
A cheque is paper instructing the bank to pay a specific amount from the person’s account to the person in whose name the cheque has been issued .
Loan activities of Banks
- Banks keep a small proportion of their deposit as cash with themselves
- Banks make use of the deposits to meet the loan requirements of the people
- Banks mediate between those who have surplus funds (the depositors) and those who are in need of these funds(the borrowers)
- Banks charge a higher interest rate on loans than what they offer on deposits
- The difference between what is charged from borrowers & what is paid to depositors is the main source of income
Credit→Loan
The lender supplies the borrower with money goods or services in return for the promise of future payment
| Story of Salim | Story of Swapna |
| Credit → Helped him | Credit →Pushed her in debt trap |
| Helps him to meet the ongoing expenses of production, complete production on time & thereby increase his earnings | The failure of the crop made loan repayment impossible |
| Credit therefore plays a vital & positive role in this situation | She had to sell part of the land to repay the loan |
Terms of credit
Interest rate collateral & documentation requirement & the mode of payment together comprises what is called the terms of credit . (+) Principal amount
Interest rate
Borrowers must pay to lender along with the repayment of the principal .
Collateral
Collateral is an asset that the borrower owns (such as land , building vehicle deposits with banks) & uses this as a guarantee to a lender until the loan is repaid
Documentation required →Paper work
Mode of Payment
Installment / lump sum cash / gold /property
Terms of credit may vary depending on the nature of the lender & the borrower
| Formal Sector Loans | Informal sector Loans |
| Loans from banks & cooperatives | Moneylenders, traders, employers, relatives & friends etc |
| The Reserve Bank of India supervises the functioning of formal sources of loans | There is no organization which supervises the credit activities of lenders in the informal sectors |
How Reserve Bank In India supervises the functioning of formal sources of Loans ?
- RBI monitors the banks in actually maintaining cash balance
- RBI sees that banks give loans not just to profit making businesses and traders but also to small cultivators , small scale industries etc.
- Periodically banks have to submit information to RBI on how much they are lending , to whom, at what interest rate etc.
Credit activities in Informal sector
No organisation which supervise it
- Interest rate
- Lenders use unfair means to get their money back
Interest rate → Cost of Borrowing
Large part of the earnings of borrowers is used to repay loan
Debt Trap
People who might wish to start an enterprise by borrowing may not do so because of the high cost of borrowing .