money and creditform

money

it is a mean of exchange, as it acts as intermediate in the exchange process

barter system of exchange

before the use of money, people followed this system. goods are directly exchanged between two or more people who agree to exchange each others’ goods. the need for each others’ goods is called double coincidence of wants

the major drawback of this system was the lack of double coincidence of wants and hence money was accepted as the common medium of exchange (an item which is widely accepted in exchange for the goods and services offered to consumers in a given market)

currency

it includes paper notes and coins

it is authorised by the government and circulated within the economy

the modern currency has no value of its own except as a medium of exchange

in india, reserve bank of india can only issue currency notes on behalf of the government of india

the rupee is widely accepted as a medium of exchange as it is legalised by law

demand deposits

also called deposits with banks, it means the amount that people keep in their bank accounts

people deposit their money in banks by opening a bank account in their name. the money in the account are in banks

bank accepts the deposits and also pay an interest on the deposits. people can withdraw money when they require

cheques

cheques are papers instructing the bank to pay a specific amount from the person’s account to that person in whose name the cheque has been issued

loan activities of banks

banks accept deposits of the people. they collect large amounts of deposits and keep only small portion of deposits (15%) as cash

this deposit is kept for depositors who wish to withdraw money from their accounts. the rest of the deposits are given as loans by the banks

when banks give loans, they charge higher rate of interest from the people who have taken loans. this becomes the income of the banks

in this way, banks act as mediator between those who have surplus funds (depositors) and those who are in need of funds (borrowers)

credit

credit or loan refers to an agreement in which the lender supplies money, goods or services to borrower with the promise of future payment

a large number of transactions in day-to-day activities involve credit in some form or the other

two different credit situations

situation 1: credit is used to meet production expenses. when the production is complete then it increases earnings. hence, here credit plays a positive role

situation 2: credit is used to meet production expenses, but the production will end up incomplete and credit pushes the borrower into a situation from which recovery is very difficult and painful. here, credit plays a negative role, pushing the borrower into a debt-trap

terms of credit

terms of credit is a set of conditions under which a loan is given

it includes method of payment, rate of interest, duration of credit and other related conditions like collateral, documentation requirement and the mode of repayment

the terms of credit vary according to the situation of the lender and borrower

collateral

it is a form of credit; a security against loans. it is an asset that the borrower owns and uses this as a guarantee to a lender until the loan is repaid

if the borrower fails to repay the loan, the lender has the right to sell the asset or collateral to obtain payment

some examples of collaterals are land titles, deposit with banks, livestock, etc.

variety of credit arrangements

there may be different credit arrangements for different categories of borrowers. these are as follows;

loans from moneylenders: small farmers borrow money from the village moneylender at high rate of interest, which leads to debt-trap

loans from traders: farmers get loans from agricultural traders at a lower rate of interest. however, the traders make the farmers to sell the crops to him only, which ensures that the money is repaid

loans from banks: some farmers take loan from banks at very low interest rate and easy repayment terms

loans from employers: landless agricultural labourers depend on their employers for loan. the workers work for landowners in order to repay the loan

loan from cooperatives: this is the major source of cheap credit in rural areas

formal sector

the formal sector comprises banks and cooperative societies

it provides loans comparatively at a lower rate of interest and collateral security is required to obtain loans

this sector is mainly supervised by the RBI

it includes banks and cooperatives

role of RBI in formal sector

RBI has major role in providing formal sector credit

it ensures that banks give loans not to just profitable businesses but also to small cultivators

periodically, banks have to submit information to the RBI on how much they are lending, tho whom and at what interest rate

the banks maintain a minimum cash balance out of the deposits they receive, which the RBI monitors

informal sector

the informal sector consists of moneylenders, friends, relatives, landowners etc.

this sector charges higher interest rates on the loans that are given as there is no supervision

this sector could lead to increasing debt

people who might wish to start an enterprise with the credit from informal sector may not do so due to high cost of borrowing. however, poor households still depend upon informal sources for their borrowing needs as they dont require any collateral

self help groups (SHGs)

self help group is a group of people usually belonging to one community having same social and economic backgrounds. they meet and save money regularly as per their ability

members of the group can take loans from the group itself. the group charges interests less than moneylenders on these loans

if the group is regular in savings (after 1-2 years), it is eligible for availing loan from a bank. it is meant to create self-employment opportunities by providing money to buy raw materials, assets etc.

SHGs impact on women

SHGs help women to be financially self-reliant and regular meetings of the group provide a platform for women to discuss and act on a variety of social issues such as health, nutrition, etc.