CBSE Class 10 Social Science Money And Credit Notes Set 03

These CBSE Class 10 Economics notes for Chapter 3 Money and Credit cover why money is better than barter, modern forms of money and bank deposits, how banks lend, two contrasting credit situations (and the debt trap), terms of credit and collateral, different real-world credit arrangements in the village of Sonpur, the formal and informal credit sectors in India, and Self-Help Groups, with a glossary at the end.

Why Is Money Better Than Barter?

In a barter system, goods and services are exchanged directly for one another, without money. This requires a double coincidence of wants: what one person wants to sell must be exactly what the other wants to buy, and vice versa. Money removes this requirement by acting as a crucial intermediate step — a shoemaker, for instance, no longer needs to find a farmer who both wants his shoes and has wheat to sell; he can simply sell his shoes for money, then use that money to buy wheat or anything else. Money is called a medium of exchange precisely because it serves this intermediate role.

The Indian rupee is India's official currency, divided into 100 paise, though by 2019 the one-rupee coin had become the smallest denomination still in common use. The Reserve Bank of India (RBI) controls the issuance of currency.

Modern Forms of Money

Before coins, a variety of objects served as money — in India, grain and cattle were used as money since ancient times, followed by metallic coins of gold, silver and copper, which remained in use well into the twentieth century. Modern money takes the form of currency — paper notes and coins — made from materials that are neither precious metals nor everyday commodities like grain or cattle.

Acceptance as a medium of exchange: because currency is authorised by the government, it is widely accepted as a medium of exchange. Indian law establishes the rupee as legal currency for settling transactions in India, and no one may legally refuse payment in rupees.

Who issues currency: the Reserve Bank of India has the sole right to issue currency notes of all denominations except one-rupee notes and coins; one-rupee notes and coins are issued by the Ministry of Finance, Government of India. All notes carry the signature of the RBI Governor, except one-rupee notes, signed by the Finance Secretary. More recently, a growing cashless economy has emerged, built on digital transactions — credit cards, debit cards, bank transfers — where no physical cash changes hands, alongside the emergence of cryptocurrencies such as Bitcoin, Ripple and Ethereum.

Deposits with Banks

People can keep money as bank deposits rather than cash, drawing on currency only for day-to-day needs. Workers paid monthly, for example, typically have surplus cash at the start of the month, which they can deposit in a bank account; banks not only accept such deposits but also pay interest on them, so people's money stays safe while also earning a return. Deposits that can be withdrawn at any time are called demand deposits. Demand deposits also offer the facility of thecheque, which gives them the character of money (a medium of exchange): a cheque is a written instruction to a bank to pay a specified sum from the account holder's account to the person named on it, used in place of cash, requiring the payer to hold a bank account with sufficient funds.

How Banks Use Deposits to Lend

Banks keep only a small share of total deposits as cash on hand — in India, roughly 15% — as a reserve to meet depositors' day-to-day withdrawal needs. The larger portion of deposits is lent out, since loans for various economic activities are in high demand. Banks charge a higher rate of interest on loans than they pay on deposits, and the difference between what they earn from borrowers and what they pay depositors is their main source of income.

Two Different Credit Situations

Credit is an arrangement in which a lender provides money, goods or services to a borrower in exchange for a promise of future repayment.

The festive season (Salim's story): Salim, a shoe manufacturer, receives a large order for 3,000 pairs of shoes, to be delivered within a month. To meet the order, he hires more workers and buys raw materials, taking credit from two sources — asking his leather supplier for leather on the promise of later payment, and taking a cash advance from the trader who placed the order, against 1,000 pairs of shoes, promising to complete the whole order by month's end. He delivers on time, earns a good profit, and repays both loans. Here, credit lets Salim meet his production costs, complete the order on time, and increase his earnings — a clearly beneficial use of credit.

Swapna's problem: Swapna, a small farmer with three acres of land growing groundnut, borrows from a moneylender to fund her cultivation, hoping her harvest will let her repay the loan. Mid-season, pests attack her crop, and even expensive pesticides fail to save it; unable to repay the moneylender, her debt grows substantially over the year. She takes a fresh loan the next year; this time the harvest is only average, and her earnings are still not enough to clear the earlier debt. She becomes trapped in debt, and is eventually forced to sell part of her land to pay it off. Instead of helping her, credit made Swapna's situation worse — an example of a debt trap, where credit pushes a borrower into a situation they struggle to recover from, often by taking a new loan simply to repay an old one, forming a repeating cycle of debt.

The crop loan cycle: crop production is the chief source of demand for rural credit. Growing a crop involves significant costs — seeds, fertilisers, pesticides, water, electricity, equipment repair — and there is usually a gap of three to four months between buying these inputs and selling the harvest. Crop loans are typically taken at the start of the season and repaid once the harvest is sold, so the ability to repay depends heavily on how well the crop actually does. Whether credit proves helpful, then, depends on the risks involved and whether support exists in case of a loss.

Terms of Credit

Every loan agreement specifies an interest rate, paid by the borrower to the lender in addition to repaying the principal. Lenders may also require collateral— an asset owned by the borrower, such as land, a building, a vehicle, livestock or bank deposits — held as security until the loan is repaid; if the borrower defaults, the lender has the right to sell this asset to recover the money owed. The terms of credit — the interest rate, any collateral and documentation required, and the mode of repayment — differ significantly from one credit arrangement to another, depending on the nature of both lender and borrower.

A Variety of Credit Arrangements

Shyamal, a loan from a village moneylender: Shyamal needs a loan every season to cultivate his 1.5 acres. He used to borrow from the village moneylender at 5% interest a month (60% a year); more recently, he has borrowed from an agricultural trader at 3% a month instead, who provides farm inputs on credit at the start of the season, to be repaid at harvest. In addition to interest, the trader requires Shyamal to promise to sell his crop to him — which both guarantees timely repayment and lets the trader profit by buying the crop cheaply right after harvest (when prices are low) and selling it later at a higher price.

Arun, a loan from the bank: Arun, who owns seven acres and employs one farm labourer, is one of the few farmers in Sonpur to have taken a bank loan, at 8.5% annual interest, repayable any time within three years. He plans to repay part of it by selling some of his crop after harvest, storing the rest (potatoes) in cold storage, and using the cold storage receipt as collateral for a fresh bank loan — a facility available to farmers who already hold a crop loan with the bank.

Rama, a loan from her landowner-employer: Rama, a farm labourer who is unemployed for several months a year, relies on credit for daily expenses, illness and family events. As a landless worker, she can only borrow from her employer, a medium-sized landowner in Sonpur, who charges 1% interest a month; she repays by working for him, and is often forced to take a new loan before the old one is cleared, currently owing him Rs 5,000. Though he treats her poorly, she continues working for him, since he is, in her words, the only real source of credit for landless people in Sonpur.

Loans from cooperatives: cooperative societies are another major source of comparatively low-cost rural credit, where members in a particular area pool their resources — farmers' cooperatives, weavers' cooperatives and industrial workers' cooperatives are all examples. The Krishak Cooperative, near Sonpur, has 2,300 farmer members, who can deposit savings with it; the cooperative uses these deposits as collateral to secure a large bank loan, which it then lends out to members. As loans are repaid, further rounds of lending become possible. The Krishak Cooperative provides loans for agricultural implements, agricultural trade, fisheries, house construction and other needs.

Formal and Informal Credit in India

Access to cheap, affordable credit is essential for the country's development. Loans fall into two broad categories:

Formal sector: loans from banks and cooperatives, with the Reserve Bank of India supervising formal lenders' activity — banks must report to the RBI on how much they lend, to whom, and at what interest rate.
Informal sector: loans from moneylenders, traders, employers, relatives and friends, with no regulatory body overseeing their lending practices, and no one to prevent unethical means of recovering money.

Only about half of rural credit needs are met by the formal sector; the rest is met informally, largely because bank loans require documentation and collateral that poor households rarely have, and take time to arrange, while poor households often need money quickly. Banks are also not present everywhere in rural India, whereas informal lenders are available in virtually every village. Formal credit needs to be distributed more equally so that the poor, too, can benefit from cheaper loans, and banks and cooperatives need to expand their rural lending, both to reduce dependence on informal credit and to make formal credit genuinely accessible to everyone, not just the better-off.

Data on urban households' loans shows a clear pattern: poor households obtain about 85% of their loans informally, and only 15% formally; households with few assets, about 53% informally and 47% formally; well-off households, about 28% informally and 72% formally; and rich households, only about 10% informally, with 90% obtained formally — showing how dependence on costlier informal credit falls steadily as household wealth rises.

(Rural credit sources, per Rs 1,000 borrowed by rural households in 2012, were split roughly as follows: moneylenders 33%, cooperative societies/banks 25%, commercial banks 25%, relatives and friends 8%, other institutional agencies 5%, other non-institutional agencies 2%, landlords 1%, government 1%.)

Self-Help Groups (SHGs) for the Poor

Self-Help Groups bring together poor people, especially women, from rural areas, typically in groups of 15-20 members from the same locality. Members pool their savings, and can borrow from this pooled fund at a mutually decided interest rate, without needing collateral. Because the loans involved are small, this is also known as micro-finance. The government and its policies support such groups. In rural areas, SHGs have significantly reduced dependence on informal moneylenders, and many large organisations also now actively promote SHGs across India.

Glossary

Money: anything generally accepted as payment for goods and services, or as repayment of debt; its functions include acting as a measure of value, a medium of exchange, and a store of value.
Barter System: an older form of trade in which goods and services are exchanged directly for one another, without money.
Double Coincidence of Wants: a situation where what one person wishes to sell is exactly what the other wishes to buy, and vice versa — a condition barter requires but money does not.
Demand Deposit: a bank deposit that can be withdrawn at any time, on demand.
Cheque: a written instruction to a bank to pay a specified sum from a person's account to the person named on it.
Credit: an arrangement in which a lender provides money, goods or services to a borrower against a promise of future repayment.
Debt Trap: a situation in which credit pushes a borrower into a cycle of repeated borrowing just to repay earlier loans, from which it becomes very difficult to recover.
Terms of Credit: the interest rate, collateral and documentation requirements, and mode of repayment attached to a loan.
Formal Sector: credit from banks and cooperatives, regulated by the Reserve Bank of India.
Informal Sector: credit from moneylenders, traders, employers, relatives and friends, with no regulatory oversight.
Self-Help Groups (SHGs): small groups, typically of 15-20 rural poor (especially women), who pool their savings and lend to members from this fund, at an agreed interest rate and without collateral.