CBSE Class 10 Social Science Money and Credit Notes Set 05

Money as a medium of exchange

Money is anything that people accept as a medium of exchange. Before money, goods were exchanged directly in a barter system. Barter needs a double coincidence of wants: each person must have what the other wants. Barter also lacks a common measure of value and makes it hard to store value. Money solves these problems by acting as a medium of exchange, a measure of value and a store of value.

Modern forms of money

1. Currency: paper notes and coins. In India, notes are issued by the Reserve Bank of India (RBI), and the law allows no one else to issue them. The rupee is legal tender, so no one can refuse payment in rupees in India.
2. Deposits with banks: people deposit extra cash in bank accounts and can withdraw it on demand, so these are called demand deposits. Payment can be made by cheque, which is a paper instructing the bank to pay a specified amount from the account of the person who issues it. Because demand deposits are widely accepted and are used for payments in place of cash, they are considered money.

How banks work

Banks accept deposits and pay interest on them. They keep only a small part of deposits as cash, because on any day only a few depositors withdraw money. The major part is used to give loans to those who need credit, at a higher rate of interest than they pay depositors. The difference between the interest charged and interest paid is the main income of banks.

Credit and its terms

Credit is an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payment. Credit helps people to produce, earn more and increase their income, but it can also trap borrowers in debt when the crop fails or business makes a loss. The terms of credit are 1. the interest rate, 2. collateral, 3. documentation required, and 4. the mode of repayment. Collateral is an asset, such as land, a building, a vehicle, livestock or bank deposits, that the borrower pledges as a guarantee until the loan is repaid. If the loan is not repaid, the lender has the right to sell the asset.

Formal and informal credit

Formal credit comes from banks and cooperatives, which work under the supervision of the RBI. It is cheaper and is based on documents and collateral. Informal credit comes from moneylenders, traders, employers, relatives and friends. They are not supervised by any authority and often charge a high rate of interest, but they are easy to approach and need no collateral. The RBI supervises banks: it makes sure they keep a minimum cash balance, give loans to small borrowers and report regularly on how much they lend, to whom and at what interest rate.

Because formal credit is cheaper, its share should rise so that more people can borrow at low rates. At present, richer households get most of their loans from formal sources, while a large share of poor households still depend on informal sources. Cheap and affordable credit is crucial for development, as it lets small farmers and businesses invest and earn more.

Self Help Groups

To help the poor get credit without collateral, Self Help Groups (SHGs) have been formed, mostly of women in villages. Members save small amounts regularly. The group lends from this pooled money at reasonable interest, and later the group can take a bank loan. SHGs also help women become financially independent and give them a platform to discuss social issues.

Worked examples

Example 1. A farmer borrows ₹ 50,000 for one year at 12 per cent simple interest. How much must he repay?
Answer: Interest = 50,000 × 12 ÷ 100 = ₹ 6,000, so he repays 50,000 + 6,000 = ₹ 56,000.

Example 2. A bank has deposits of ₹ 10 crore and keeps 15 per cent as cash. How much can it lend?
Answer: Cash kept = 15% of 10 crore = ₹ 1.5 crore. Money available for loans = 10 − 1.5 = ₹ 8.5 crore.

Example 3. Why do many poor households still borrow from moneylenders?
Answer: Banks are not available everywhere and demand documents and collateral that poor people lack. Moneylenders are near, quick and ask for no collateral, though they charge high interest.

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