Economics Notes (Class 10)

CBSE Class 10 Economics Chapter 3 Money & Credit

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Money & Credit

Money & Credit

Money & Credit

Important Notes

  • Money is anything which is commonly accepted as a medium of exchange and in the discharge of debts.
  • People exchange goods and services through the medium of money. Money by itself has no utility. It is only an intermediary. The use of money facilitates exchange.
  • Direct exchange of goods against goods without the use of money is called barter exchange (i.e. exchange of goods for goods). This is also known as CC economy (i.e. commodity for commodity economy).
  • Simultaneous fulfillment of mutual wants by buyers and sellers is known as double coincidence of wants. Let us understand this concept with the help of an example: A shoe manufacturer wants to sell his shoes in the market and buy wheat. Now he has 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 shoes in exchange.
  • Before the introduction of coins, a variety of objects were used as money. For example. since the very early ages, Indians used grains and cattle as money. Thereafter came the use of metallic coins-gold, silver, copper coins. This process was finally taken over by the paper money (which means currency notes). As the volume of transactions increased, even paper money started becoming inconvenient because of time involved in its counting and space required for its safekeeping. This led to the introduction of bank money (credit money) in the forms of the cheque, demand drafts, credit cards etc.
  • The major function of a bank is to give loans, particularly to businessmen and entrepreneurs and thereby earn interest.
  • Banks get money for providing loans by accepting the deposits from people. Deposits are the lifeline of a bank. These are of two types: time deposits and demand deposits. Time deposits can be withdrawn only after a specified period of time. Demand deposits in the bank can be withdrawn on demand by issuing cheques.
  • The facility of cheques against demand deposits makes it possible to directly settle payments without the use of cash.
  • Credit (i.e. giving loans) refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payments with interest. Credit plays a vital and positive role in society. This can be explained further with the help of a suitable example. Saleem obtains loans to meet the needs of production. The credit helps him to meet the need for ongoing expenses of production, complete production in time and thereby increase his earnings.
  • Sometimes, credit, instead of helping people, pushes them into a debt trap. In Swapana’s case who is a farmer, the failure of the crop made loan repayment impossible. Credit, in this case, pushes the borrower into a situation from which recovery is painful.
  • Terms of credit include interest rate, collateral and documentation requirements and the mode of repayment. The terms of credit may vary depending on the nature of the lender and the borrower.
  • Collateral is an asset that the borrower owns (such as land, building, vehicles, livestock etc.) and uses this as a guarantee to the lender until the loan is repaid.
  • Formal credit is generally available with the banks and cooperatives. They charge lesser rates of interest than informal institutions. The Reserve Bank of India (RBI) supervises the functioning of formal sources of the loan.
  • Informal lenders include moneylenders, traders, employers, relatives, and friends etc. They charge much higher interest on loans. There is no one to stop them from using unfair means to get their money back.
  • The idea behind Self-Help Groups is to organize the rural poor into self-help groups and collect their savings. Saving per member varies from Rs 25 to Rs 100 or more depending on the ability of the people to save. Members can take small loans from the group itself to meet their own needs. The group charges less rate of interest on these loans. If the group is regular in savings, it becomes eligible for availing loan from the bank.
Important Questions
 
Q. Which are two major sources of formal sector credit in India? Why do we need to expand the formal sources of credit?
A. Formal sector credit in India includes loans from banks and cooperatives. RBI supervises their functions of giving loans. The lower rate of interest is charged as compared to informal sources of credit on these loans. Need to expand formal sources of credit: Formal sector credit needs to be expanded in India so as to save people and especially poor farmers and workers from the exploitation of the informal sector credit. Formal sector lends at a reasonable rate of interest which is very cheap. Formal credit can fulfill various needs of the people by providing cheap and affordable credit.
Q. Why should credit at reasonable rates be available for all?
A. If credit is available at a reasonable rate, this would lead to higher income and many people could then borrow for a variety of needs such as for growing crops, for setting small-scale industries, for business etc. Thus credit at a reasonable rate will be helpful in the development process of a country.
 
 
Q. How is credit helpful for the country’s development?
 
A.  Large numbers of transactions in our day to day activities involve credit in some form or the other. Credit helps people to meet the ongoing expenses of production, complete production on time and thereby increase their earnings. Hence, it plays a vital and positive role in a country’s development.
 
 
Q. What is the basic idea behind the SHG’s for the poor? Explain in your words.
 
A.  The basic idea behind the SHG’s for the poor is to provide credit facilities at a cheaper rate and also without much documentation process.
An SHG has 15-20 members, usually from the neighborhood, who meet and save regularly in the range of Rs 25 to Rs 100 or more. The amount which is collected by an SHG is utilized to give a loan to a member of the group. Now the group decides as regards the loans to be granted, the purpose, amount, interest to be charged, and its repayment schedule.

Q. Why do we need to expand formal sources of credit in India?

A. Formal sources of credit in India provide loans to individuals at far cheaper rates than informal sources of credit. This helps to increase their income and they are able to repay the principal amount as well as interest by parting with a small part of their higher income. It will lead to more production. This helps in the economic development of a country.

Q. What is the main source of income for banks?

A. The main source of income for banks is the difference between the interest rate charged from borrowers and what is paid to depositors. After keeping a portion of deposits as reserves banks lend to people who demand money as loan and bank charges interest from them.

Q.  What do the banks do with the ‘Public Deposits’? Describe their working mechanism.

A. Banks accept deposits from the Public and use the major portion of these deposits to extend loans. There is a huge demand for loans for various economic activities. Banks make use of these deposits to meet the loan requirement of the people and thereby earn interest. This is, in fact, the main source of income of the bank. In this way, the bank acts as a mediator 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.

Q. What are demand deposits? Describe any three salient features of demand deposits.

A.  People with surplus money or extra amount deposit it in banks. The banks keep the money safe and give an interest in it. The deposits can be drawn at any time on demand by the depositors. That is why they are called ‘demand deposits’.


  • The demand deposits encashable by issuing cheques have the essential features of money.
  • They make it possible to directly settle payments without the use of cash.
  • Since demand drafts/cheques are widely accepted as a means of payment along with currency, they constitute money in the modern economy.
 
Q. Mention any three points of distinction between formal sector loan and informal sector loan.
 
A. 

 

Formal Source of Credit
Informal Source of Credit
  1. Formal sources of credit are generally provided by banks and cooperatives.
  2. The interest rate for repaying loans is lower.
  3. RBI supervises the functioning of formal sources of the loan and also ensures that these facilities should also be given to small cultivators and small borrowers.
 
  1. Formal sources of credit are generally provided by banks and cooperatives.
  2. The interest rate for repaying loans is lower.
  3. RBI supervises the functioning of formal sources of the loan and also ensures that these facilities should also be given to small cultivators and small borrowers.
 

Q. Explain any two features each of formal sector loans and informal sector loans.

A. Features of formal sector loans are :

  • Formal sectors provide cheap and affordable loans and their rate of interest is monitored by RBI.
  •  Formal sector strictly follows the terms of credit which includes interest rate, collateral, documentation and the mode of repayment.
Features for informal sector loans are :
  • Their credit activities are not governed by any organization, therefore they charge the higher rate of interest.
  • Informal sector loan providers know the borrowers personally, and hence they provide loans on easy terms without collateral and documentation.
 
Q. Why do we need to expand formal source of credit in India? Explain any four reasons.
 
A.  If the loans are cheap and affordable, this can lead to countries development in the following ways:
  • Cheap loans result in higher incomes and higher profits which can help in the expansion of the business.
  • More and more people can be benefitted by the loans in their businesses.
  • This can help in making more and more agricultural activities, small-scale industries etc. Credit can be distributed more equally which helps in benefitting the poor with the help of cheaper loans.
 
Q. What is meant by the term of credit? What does it include?
 
A. Terms of credit are the requirements need to be satisfied for any credit arrangements. It includes interest rate, collateral, documentation, and mode of repayment. However, the terms of credit vary depending upon the nature of the lender, borrower, and loan.
 
 
Q. How does the Reserve Bank of India supervise the functioning of banks? Why is this necessary?
 
A. Reserve Bank of India (RBI) supervised the banks in the following ways :
  • It monitors the balance kept by banks for day-to-day transactions.
  • It checks that the banks give loans not just to profit-making businesses and traders but also to small borrowers.
  • Periodically banks have to give details about lending, borrowers and interest rate to RBI. It is necessary for securing public welfare. It avoids the bank to run the business with profit motive only. It also keeps a check on the interest rate of credit facilities provided by the bank. RBI makes sure that the loans from the banks are affordable and cheap.
 
Q. Describe four features of Self-Help Group (SHG).
 
A. The features of Self-Help Group (SHG) are :
  • People form their personal groups for the purpose of savings and also lend money among themselves.
  • The rate of interest is lower than informal service providers.
  • They can also avail loans from banks if their savings are regular.
  • Decisions regarding the savings and loan activities are taken by group members.
 
Q. What is double coincidence of want? How has money solved this problem?
 
A.  Things exchanged for other things without the use of money is known as the barter system. The barter system laid the foundation of trade but the trade was limited to the bounds of a village or town. Hence, in a barter system when both the parties agree to sell and buy each other’s commodities, it is known as the double coincidence of wants. Whatever commodity a person desires to sell is exactly what commodity the other wishes to buy. Without double coincidence of wants exchange of goods is not possible. Therefore, it is an essential feature.
 
Money eliminates the need of double coincidence of wants. One can easily exchange their goods in exchange for money and later on pay money for the desired commodities. Money acts as an intermediate in the process of exchange, it is called as a medium of exchange.
 
 
 

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