Money and credit

WHAT WE WILL READ IN THIS CHAPTER-

 What is money?

 Barter System

 Old forms of money

 Modern forms of money

 Currency: Medium of exchange  Deposits with banks

 Demand deposits

 Cheque

 Loan activities of banks

 Credit,Dept trap and collateral

 Terms of credit

 Different sectors of credit arrangement

 Role of Reserve Bank of India in the formal sectors.

 Informal sectors

 Sources of credit for rural households in India in 2003

 Why is it important that the formal sectors should lend more?

 Self Help Groups

 Why are the SHGs popular?

WHAT IS MONEY?

● Money is something that can be used as a means of paying, a measure of value or a medium of exchange.

● The main function of money in the economic system is to facilitate the exchange of goods and services.

BARTER SYSTEM

● In a barter system, commodities are exchanged with commodities without the use of money.But both parties have to agree to sell and buy each other’s commodities.

●This is called double coincidence of wants.

●Money eliminates the need of double coincidence of wants.

CURRENCY

Modern forms of money includes-paper notes and coins. It is not made of precious metals as gold, silver, copper coins.

Ques: Why is currency accepted as a medium of exchange?

1. The currency is authorised by the government of India.

2. The Reserve Bank of India (RBI) issues currency on behalf of the central government.

3. As per Indian Law, no other individual or organisation is allowed to issue currency.

4. A law legalises the use of rupee (₹) as a medium of payment that cannot be refused in settling the transactions in India.

5. No individual in India can legally refuse a payment made in rupees (₹).

DEPOSITS WITH BANKS

■ People deposit money which they do not need at a point of time by opening a bank account in their name.

■Banks accept the deposits and also pay an amount of interest on the deposits.

■Since the deposits in the bank accounts can be withdrawn on demand, these deposits are called demand deposits.

FEATURES OF CHEQUES

1..Cheque is a written document prescribed form provided by bank.

2..It is written by a depositor to his banker.

3..It caries an order to pay a certain sum of money from the deposit.

4..It is a modern form of money

Essential components of a cheque÷

Signature of depositor.
Name of payee (Self/ Bearer/any third party)
Amount must be specific and written in both words and numbers.
Date of drawing or making.
Account number of the depositor.

LOAN ACTIVITIES OF BANKs

■Banks keep only a small proportion of their deposits with themselves, as a provision to pay the depositors who might come to withdraw from the bank on any given days.

■Banks use a major portion of the deposits to extend loan(credit).

■Banks mediate between those people who have surplus funds(depositors) and those people who are in the need of those funds(borrowers).

■Banks charge a higher rate of interest on the loan than what they offer on deposits.

■The difference between what is charged from borrowers and what is paid to the depositors is their main source of income.

CREDIT

■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.

TWO DIFFERENT CREDIT SITUATIONS ÷

● A large number of transactions in our day- to-day activities involve credit in some form or the other.

•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.

•Let us see how credit works through the following two examples.

Conclusion of above pics-

1.. In one situation credit helps to increase earnings and therefore the person is better off than before.

2..In another situation, because of the crop failure, credit pushes the person into a debt trap.

3..To repay her loan she has to sell a portion of her land. She is clearly much worse off than before.

4..Whether credit would be useful or not, therefore, depends on the risks in the situation and whether there is some support, in case of loss.

DEBT TRAP

■At times repayment of the loan becomes difficult and credit instead of improving the earnings, pushes the borrower into a situation from which recovery is very difficult and painful. This situation is called debt- trap.

TYPES OF CREDIT

1..Collateral÷ Collateral is an asset that the borrower own ( such as land, building, vehicle, live stocks, deposits with banks) and uses this as a guarantee to a lender until the loan is repaid.

■If the borrower fails to pay the loan, the lender has the right to sell the asset or collateral to obtain payments.

2.. Documentation

3.. Tenure

4..Mode of Repayment

5.. Rate of interest

The terms of credit vary substantially from one credit arrangement to another.

CREDIT ARRANGEMENT IN INDIA

FORMAL SECTOR CREDIT-

• Banks

• Cooperatives

INFORMAL SECTOR CREDIT-

• Money lenders

• Traders

• Relatives and friends

Ques: What is the role of Reserve Bank of India in formal sector?

◇Reserve Bank of India supervises the functioning of the formal .

◇It monitors the banks in actually maintaining cash balance.

◇RBI sees that banks gives loans not only to the profit making businesses and traders but also to small cultivators, small scale industries, small borrowers etc.

◇Banks have to submit information to the RBI periodically on how much they are lending, to whom, at what interest rate etc.

Ques: Why is it important that the formal sectors should lend more?

1..The formal sector still meets only about half of the total credit needs of the rural people.

2.. Most loans from the informal lenders carry a very high interest rate and do little to increase the income of the borrowers.

3.. Thus the banks and the cooperatives need to lend more particularly in the rural areas, so that the dependence on the informal sector reduces.

4..While formal sector loans need to expand, it also necessary that everyone receives the loans.

SELF HELP GROUPS

1.. the self help groups is a modern form of Financing the small finance needs of borrows who cannot obtain loans from banks because of their inadequate financial documents and lack of collateral.

2.. Self- Help Groups consists of 15- 20 members.

3..The members pool their savings and after some time, it becomes a large amount which is used to give loans to the needy ones at a very normal rate of interest.

4..This helps to reduce the functioning of informal sectors of credit.

5..After a year or so, if such group is regular in its savings, it becomes eligible for availing loan from the bank.

6..Loan is sanctioned in the name of the group and is meant to create self-employment opportunities for the members .

7..Loans are provided for releasing mortgaged land, for meeting working capital needs as buying seeds, fertilisers, raw materials, for acquiring assets like sewing machines, handlooms, cattle etc.

8..Important decisions regarding the savings and loan activities are taken by the group members.

9..The group decides the purpose, amount, interest to be charged, repayment of the loan etc.

10..Non- repayment of the loan is taken seriously. Because of this feature the banks are willing to lend loan especially to the poor women when organised in SHGs.

The Self Help Groups are becoming popular for the following reasons:

1.. They help the borrowers overcome the problem of lack of collateral.

2.. They can get timely loans for variety of purposes and at a reasonable interest rate.

3.. They are the building blocks of the organisation of the rural poor.

4..It helps women to become self reliant.

5..The regular meetings of the group provide a platform to discuss and act on various social issues such as health, nutrition, domestic violence, etc.