CBSE Class 10 Social Science Money and Credit Notes Set 06

Money as a medium of exchange

Money is anything accepted by common agreement as a medium of exchange. In a barter system, goods are exchanged directly, and trade requires a double coincidence of wants: each party must want exactly what the other has. A shoe-maker who wants wheat must find a farmer who wants shoes. When money is used, this need disappears: the shoe-maker sells shoes for money and uses the money to buy wheat. Money also acts as a measure of value and a store of value.

Modern forms of money

Earlier, coins of gold, silver and copper were used as money. Today we use currency, paper notes and coins. In India the Reserve Bank of India (RBI) issues currency notes on behalf of the central government, and the law says no one else may issue them. The rupee is legal tender in India, so it cannot be refused in settling payments.

People also deposit money with banks, which accept deposits and pay interest. Deposits that can be withdrawn on demand are called demand deposits. Payment can be made without cash by writing a cheque, a paper instructing the bank to pay a specified amount to the person named. Demand deposits are accepted widely as a means of payment, so they are also considered money.

Banks and loans

Banks keep only a small part of their deposits (about 15 per cent) as cash to meet daily withdrawals. They use the major portion of deposits to give loans. Banks charge a higher interest rate on loans than they pay on deposits, and the difference is their main income.

Credit

Credit (loan) is an agreement in which the lender supplies the borrower with money or goods, and the borrower promises to repay with interest later. Credit can help a person earn more, as when a farmer borrows for seeds and fertiliser, but it can also leave the borrower in a debt trap if the crop fails and the loan cannot be repaid.

Terms of credit consist of the interest rate, collateral, documentation requirements and mode of repayment. Collateral is an asset such as land, a building, vehicle or livestock that the borrower owns and offers as a guarantee until the loan is repaid. If the borrower fails to repay, the lender can sell the collateral.

Formal and informal credit

Formal sources are banks and cooperative societies, which work under the supervision of the RBI. The RBI makes sure that banks maintain cash balances, that they lend not only to profit-making businesses but also to small farmers and small-scale industries, and that they report regularly on how much they have lent, to whom and at what interest.

Informal sources are moneylenders, traders, employers, relatives and friends. No agency supervises their activities, they charge high interest, and they can use unfair means to recover loans. Higher interest means a larger part of income goes to repay the loan, and borrowers may end up in a debt trap.

Cheap and affordable credit is crucial for development. Despite the growth of banks, a large share of borrowing by poor rural households is still from informal sources. Poor households depend on informal sources because banks may not be nearby, they ask for collateral and documents, and moneylenders lend easily and quickly without them.

Self Help Groups

A Self Help Group (SHG) usually consists of 15 to 20 members, mostly women from one neighbourhood, who save regularly and pool their savings. The group gives small loans to members at reasonable interest, and also loans from banks to the group are easier to obtain. SHGs help borrowers get loans without collateral, free them from moneylenders, and develop habits of saving and cooperation.

Worked examples

Example 1. A farmer borrows ₹50,000 for one year, either from a bank at 8 per cent or from a moneylender at 36 per cent a year. Compare interest. Bank interest = 50,000 × 8 ÷ 100 = ₹4,000. Moneylender interest = 50,000 × 36 ÷ 100 = ₹18,000. The moneylender's loan costs ₹14,000 more.

Example 2. Why are demand deposits considered money? They can be withdrawn at any time and payments can be made through cheques. Since they are accepted as a medium of exchange, they function as money.

Example 3. State two benefits of depositing money in a bank. The money is safe and earns interest. It can be withdrawn on demand and used for payment by cheque.

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