The document discusses different aspects of money and credit. It explains that money acts as a medium of exchange that facilitates transactions between parties. It also discusses different forms of money like currency and different types of credit like formal credit from banks and cooperative societies versus informal credit from money lenders. The informal credit sector typically charges very high interest rates and can often lead borrowers into debt traps.

2.  In many transactions, goods are being bought
and sold with the use of money.
 In some of these transactions, services
 are being exchanged with money.
 For some, there might not be any actual
transfer of money taking place now but a
promise to pay money later.

3.  The reason is simple. A person holding money can easily exchange
it for any commodity or service that he or she might want.
 Thus everyone prefers to receive payments in money and then
exchange the money for things that they want.
 Take the case of a shoe manufacturer. He wants to sell shoes in the
market and buy wheat. The shoe manufacturer will first exchange
shoes that he has produced for money, and then exchange the
money for wheat. Imagine how much more difficult it would be if
the shoe manufacturer had to directly exchange shoes for wheat
without the use of money.
 He would have to look for a wheat growing farmer who not only
wants to sell wheat but also wants to buy the shoes in exchange.
 That is, both parties have to agree to sell and buy each others
commodities. This is known as double coincidence of wants.
 money acts as an intermediate in the exchange process, it is called
a medium of exchange.

4.  Modern forms of money include currency — paper notes
and coins.
 It is accepted as a medium of exchange because the
currency is authorised by the government of the
country.
 In India, the Reserve Bank of India issues currency notes
on behalf of the central government.
 As per Indian law, no other individual ororganisation is
allowed to issue currency.
 Moreover, the law legalises the use of rupee as a
medium of payment that cannot be refused in settling
transactions in India.
 No individual in India can legally refuse a payment
made in rupees.
 Hence, the rupee is widely accepted as a medium of
exchange.

12.  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.

13.  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 has been issued.

15.  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.
 Banks use the major portion of the deposits to extend
loans. There is a huge demand for loans for various
economic activities. So the banks give money on credit to
people who need the credit.
 A bank charges interest on the loan which it gives to its
creditors.
 Banks charge a higher interest rate on loans than what
they offer on deposits. Thus, interest is the main source
of income for banks.
 In this way, banks mediate between those who have
surplus funds (the depositors) and those who are in need
of these funds (the borrowers).

16.  Credit (loan) refers to an agreement in which
the lender supplies the borrower with money,
goods or services in return for the promise of
future payment.
 Credit plays a vital and positive role in this
situation.
 The credit helps to meet the ongoing
expenses of production, complete production
on time, and thereby increase earnings.

17.  In some case credit pushes the borrower into a
situation from which recovery is very painful.
 Farmers usually take crop loans at the beginning
of the season and repay the loan after harvest.
Repayment of the loan is crucially dependent on
the income from farming.
 The failure of the crop made loan repayment
impossible.
 They had to sell part of the land to repay the
loan.
 Credit, instead of helping, improve earnings, left
them worse off. This is commonly called debt-
trap.

18.  In one situation credit helps to increase
earnings and therefore the person is better
off than before.
 In another situation, because of the crop
failure, credit pushes the person into a debt
trap.

21.  Now-a-days, credit/debit cards are in vogue
(fashion).
 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.

23.  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 equipments, etc.
 People usually buy vehicles and houses by borrowing
from banks.
 Thus, credit plays an important role in the economy.

24.  Every loan agreement specifies terms and
conditions; regarding the rate of interest and term
of payment.
 In most of the cases, the banks fix an EMI (Equated
Monthly Installment) for repayment of loan.
 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, livestocks, 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.
 Interest rate, collateral and documentation
requirement, and the mode of repayment together
comprise what is called the terms of credit.

30.  The various types of loans can be conveniently
grouped as
 formal sector loans and
 informal sector loans
 The different sources of credit are:
 Banks
 Traders
 Cooperative societies
 Landlords
 Moneylenders
 Relatives and friends

31.  Formal Sector :The formal Sector comprises
of banks and cooperative societies.
 The formal sector is bound by the rules and
regulations of the RBI.
 Charge the prevalent rate of interest as per
RBI guidelines.

32.  Informal Sector: The informal sector consists of
money lenders and friends and relatives,
merchants and landlords.
 The informal lenders are not bound by such
rules.
 The informal lenders usually charge a very high
rate of interest.
 A higher cost of borrowing is often detrimental
to the borrower.

33.  The Reserve Bank of India supervises the functioning of
formal sources of loans.
 For instance, we have seen that the banks maintain a
minimum cash balance out of the deposits they
receive.
 The RBI monitors the banks in actually maintaining cash
balance.
 Similarly the RBI sees that the banks give loans not just
to profit-making businesses and traders but also to
small cultivators, small scale industries, to small
borrowers etc.
 Periodically, banks have to submit information to the
RBI on how much they are lending, to whom, at what
interest rate, etc.

34.  This would lead to higher incomes and many
people could then borrow cheaply for a
variety of needs.
 They could grow crops, do business, set up
small-scale industries etc.
 They could set up new industries or trade in
goods.

36.  The formal Sector comprises of banks and
cooperative societies.
 The formal sector provides only marginally more
credit than the informal sector currently.
 The credit activities of the formal sector are
supervised by the Reserve Bank of India.
 The RBI gives credit to all at low interest rates.
 In the informal sector there is no supervisory body.
The credit activities of this sector are only driven by
profit with much higher interest rate.
 A high rate of interest means that a borrower spends
more money to repay the loan and is left with less
money for himself.
 This also leads to a debt trap.

37.  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. Saving per member varies from
Rs 25 to Rs 100 or more, depending on the ability of the people
to save. 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.
 The SHGs help borrowers overcome the problem of lack of
collateral.
 They can get timely loans for a variety of purposes and at a
reasonable interest rate.
 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.
