Money and Credit Class 10 ||Economics|| Chapter 3 NCERT Notes
1. Money as a Medium of Exchange
Barter System: Before the invention of money, people used the barter system where goods were exchanged directly for other goods. However, it had limitations:
- Double coincidence of wants: For a barter exchange to happen, both parties need to want what the other has.
- Value Estimation: Difficulty in measuring the value of goods and services in barter exchanges.
Money: To overcome these difficulties, money was invented. Money serves as a medium of exchange, making transactions more efficient and eliminating the need for a double coincidence of wants.
Barter System: Before the invention of money, people used the barter system where goods were exchanged directly for other goods. However, it had limitations:
- Double coincidence of wants: For a barter exchange to happen, both parties need to want what the other has.
- Value Estimation: Difficulty in measuring the value of goods and services in barter exchanges.
Money: To overcome these difficulties, money was invented. Money serves as a medium of exchange, making transactions more efficient and eliminating the need for a double coincidence of wants.
2. Modern Forms of Money
In the modern economy, money is not limited to coins and paper notes. Some of the modern forms of money include:
Currency: The most common form of money is currency notes and coins. The RBI (Reserve Bank of India) issues the currency in India.
Deposits with Banks: People also deposit their earnings in banks, which keeps the money safe and allows them to withdraw it when needed. These deposits are also a form of money.
- Demand Deposits: The deposits that can be withdrawn anytime on demand, such as from savings or current accounts, are called demand deposits.
Cheque: A cheque is a paper instructing the bank to pay a specific amount from the person’s account to the person in whose name the cheque is issued. Cheques help in transactions without the need for physical money.
3. Loan and Credit
Credit is an agreement between lenders and borrowers, where the borrower receives money or goods and agrees to repay at a later date. Loan and credit are important in facilitating production, trade, and economic activities.
3.1 Terms of Credit
Credit involves various terms and conditions between the lender and the borrower. These terms include:
- Principal Amount: The original loan amount.
- Rate of Interest: The interest that must be paid on the loan.
- Collateral: Assets pledged by the borrower to the lender as security for the loan. In case of a loan default, the lender can seize the collateral.
- Mode of Repayment: The manner and time frame in which the loan is to be repaid.
3.2 Types of Credit
Formal Sector Credit: Loans provided by banks and cooperative societies that are regulated by the government and RBI. These lenders charge reasonable interest rates and are safer.
- Example: Commercial banks, Regional Rural Banks, and cooperatives.
Informal Sector Credit: Loans provided by moneylenders, landlords, traders, and relatives. These loans often come with higher interest rates, and the terms are not regulated, which can lead to exploitation.
- Example: Local moneylenders, traders, friends, and family.
Formal Sector Credit: Loans provided by banks and cooperative societies that are regulated by the government and RBI. These lenders charge reasonable interest rates and are safer.
- Example: Commercial banks, Regional Rural Banks, and cooperatives.
Informal Sector Credit: Loans provided by moneylenders, landlords, traders, and relatives. These loans often come with higher interest rates, and the terms are not regulated, which can lead to exploitation.
- Example: Local moneylenders, traders, friends, and family.
3.3 Formal vs. Informal Sources of Credit
| Aspect | Formal Sector (Banks, Cooperatives) | Informal Sector (Moneylenders, Traders) |
|---|---|---|
| Regulation | Regulated by the RBI | Unregulated |
| Interest Rates | Fixed and lower | Higher, can be exploitative |
| Collateral Requirement | Usually required | Sometimes not required |
| Flexibility in Terms | Standardized terms | Very flexible, but often in favor of the lender |
| Reach | Limited to urban and semi-urban areas | Available in rural and remote areas |
4. Role of Banks
Banks play a crucial role in the economic development of the country. They accept deposits from people, provide loans, and facilitate transactions through cheques and other forms of payments.
4.1 Functions of Banks
Accepting Deposits: Banks accept deposits from people, keeping their money safe. In return, banks pay interest to depositors.
Providing Loans: Banks use a portion of their deposits to extend loans to people and businesses. This helps in production, trade, and employment generation.
Creating Money: By issuing loans, banks create money in the economy. This happens because the deposited money is lent out to borrowers, who, in turn, spend it, and it circulates back to the bank system.
Accepting Deposits: Banks accept deposits from people, keeping their money safe. In return, banks pay interest to depositors.
Providing Loans: Banks use a portion of their deposits to extend loans to people and businesses. This helps in production, trade, and employment generation.
Creating Money: By issuing loans, banks create money in the economy. This happens because the deposited money is lent out to borrowers, who, in turn, spend it, and it circulates back to the bank system.
5. Self-Help Groups (SHGs)
Self-Help Groups are small groups of people (usually 15-20 members) who pool their savings and use it to provide loans to each other at lower interest rates. These groups help people who do not have access to formal sources of credit.
- Features of SHGs:
- Regular savings by members.
- Interest rates on loans are decided by group members.
- Groups are eligible to take loans from banks and other financial institutions after demonstrating financial discipline.
Importance of SHGs:
- SHGs provide credit to the poor, particularly women, without requiring formal collateral.
- They empower the poor by helping them become financially independent.
- SHGs play a role in improving the standard of living in rural areas by promoting savings and small-scale entrepreneurship.
6. The Necessity of Formal Credit in India
- Formal credit sectors like banks and cooperatives need to play a larger role in rural credit to reduce dependency on informal sources like moneylenders.
- Government policies should aim at expanding the reach of the formal sector to ensure that people, especially in rural areas, get loans at reasonable interest rates.
7. Credit and Economic Development
- Availability of credit helps businesses expand, leading to economic growth.
- Easy and affordable credit can improve living standards by enabling people to buy assets like houses, education, and consumer goods.
- However, over-borrowing or misuse of credit can lead to debt traps, where borrowers are unable to repay and face severe consequences like losing their assets.
Conclusion
Money plays an essential role in the economy by facilitating transactions, and credit is crucial for economic growth and development. While formal sources of credit are beneficial due to lower interest rates and regulation, informal credit sources can lead to exploitation. Expanding formal credit to rural areas and promoting institutions like Self-Help Groups (SHGs) are important steps in making credit more accessible to all sections of society.