Money and Credit

Economics

Chapter 3

Money and Credit

Ø  Bank

An institution which accept deposit from public for the purpose of lending and investment.

Ø  Barter System

ü  Before the advent of money , people used to follow the barter system of exchange.

ü  It means exchange of goods for goods.

ü  Suppose somebody has surplus vegetables and he needs wheat in lieu of that then he could find a person who has surplus wheat and needs vegetables.

Ø  Double Coincidence of Wants

ü  It refers to a situation where in what a person wishes to sell is exactly the same as that the other person wishes to buy.

ü   This is a concept in the barter system in which goods are exchanged directly without the use of money.

Ø  Money

It is a medium of exchange.

ü  It eliminates the double coincidence of wants.

Ø  Forms of Money in historical times in India

ü  Ancient period: Grain and cattle were used as money.

ü  Medieval period: Metallic coins of gold, silver, copper and lead were used as money.

ü  Modern period: Paper currency and coins are used as money.

Ø  Money in India

ü  Rupee is the Indian currency.

ü  Money has value because it has got the sanction of the government.

ü  Reserve Bank of India (RBI) is authorized to issue currency notes on behalf of the Government of India.

ü  Indian Monetary System: The system of managing demand and supply of money by the Reserve Bank of India is known as Indian Monetary System.

ü  ATM’s is a free standing self service terminal performing 60% of tellers job quickly and at lesser cost at any time.   

Ø  Other forms of Money

Ø  Bank Deposits

ü  People deposit their money in banks by opening a bank account.

ü  Banks keep the money safe and also provide interest on the deposited amount of money to the depositors.

ü  The deposited money can be withdrawn from banks as and when required on demand. Hence, bank deposits are also called demand deposits.

ü  Bank deposits also facilitate easy transfers of money through cheques, demand drafts or internet banking.

ü  Cheque: A cheque is a document issued by an account holder to the bank, instructing the bank to pay a specific amount from the issuer’s account to the person in whose name the cheque has been issued.

ü  Crossing of the cheque : Drawing two parallel lines on the left side on top of a cheque is called crossing of the cheque.

Ø  Loans / Credit

Banks provide loans to people at some interest rate.

ü  Banks keep only 15% of their total deposits as cash to meet the day-to-day withdrawal demands.

ü  Rest of the cash is extended as loans to those who need it (borrowers) at a specific rate of interest.

ü  The interest provided by banks to depositors is less than the interest charged by banks from borrowers on loans.

This difference is the main source of income of banks.

ü  Banks provide housing loans, vehicle loans, farm loans, education loans, personal loans etc. to meet the specific requirements of borrowers.

Ø  Debt Trap

ü  It is a situation in which a person is caught in the vicious cycle of debts.

ü  He/she takes loans for meeting his/her requirements and on being unable to pay back the loan, takes a fresh loan to repay the old loan.

ü  This leaves him/her indebted all through his/her life.

Ø  Collateral

ü  It is an asset owned by the borrower such as land, building, vehicle, livestock etc., which is kept with the bank as a guarantee against a loan until the loan is repaid.

ü   In case of failure in repaying the loan, the bank would have the right to sell the collateral to recover the loan amount.

Ø  Terms of Credit

ü  Interest rate

ü  Collateral security

ü  Mode of payment

Ø  Loans from Cooperatives

ü  Cooperative societies are small scale organizations formed by people themselves.

ü  The members of cooperatives pool their resources in the account of the cooperative and then extend loans to those in need.

ü  Cooperatives also take loan from banks.

ü  There are several types of cooperatives such as krishak cooperatives, weaver’s cooperatives, industrial workers’ cooperatives etc.

Ø  Sources of Credit

Ø  Formal Sector Loans

ü  These consist of loans from banks and cooperatives

ü  These loans are supervised by the RBI

ü  The terms of credit are fixed

ü  Rate of interest is not very high

ü  It comprises 52% of the total loans given in the country

Ø  Informal Sector Loans

ü  These consist of loans from moneylenders, landlords, traders, relatives and friends etc.

ü  They are not under the control of the RBI

ü  The rates of interests are exorbitant

ü  It comprises 48% of the credit in the country

ü  It is mostly taken by poor rural households

ü  Local money lenders: They are informal institutions who lend money on the basis of nearness of the local population.

Ø  Self-Help Groups

ü  SHGs are small groups of people who pool their savings and lend money to those members who are in urgent need of money.

ü  It usually consists of 15–20 members. The rate of interest charged on the loan is very low. A regular group with some savings is also eligible for availing bank credit.

ü  These groups are created with the purpose of creating self-employment opportunities for the members.

SHGs of women have been a great success in India in making women self-reliant.

Ø Grameen Bank

ü  Started in 1970s as a small bank in Bangladesh

ü  Formed by Professor Mohammad Yunus who was awarded the Nobel Peace Prize in 2006.

ü  Most borrowers are women.

Question bank

Very short answers.

1. What is barter?
2. Who governs all the financial institution?
3. Name the system of exchange of goods to goods.
4. What are the modern forms of money?
5. Write the primary functions of money.
6. What is collateral?
7. Who can provide a formal sector of loan?
8. Write the full form of SHG.
9. Write the function of RBI.
10. Mention any two products which were used as medium of exchange before invent of money.
11. Mention two limitation of barter system?
12. How money solved the problem of the double coincidence of wants?
13. What are demand deposits?
14. What is credit?
15. What are the formal sources of credit?
16. What are the informal sources of credit?
17. State the importance of cheque as a medium of exchange in present time.
18. Explain money as a legal tender
19. What is a cheque?
20. Why money is considered as the most appropriate regarding transaction?
21. Name the new way of providing loans to the rural poor?
22. Who has the authority to issue currency?
23. For which type of account banks will provide a high rate of interest?
24. Which is the main source of credit for rich urban households in India?
25. Which is the essential feature of barter system?
26. What is the main source of income to the banks?
27. How much percent of wants does bank hold as cash?
28. Which is an asset that the borrower owns and uses as a guarantee until the loan is repaid to the lender?
29. How many members a typical self group should have?
30. Why do banks keep small proportion of deposits as cash with themselves?
31. Professor Muhammad Yunus is the founder of which bank?
32. Which is the modern form of currency?
33. Anything which is generally accepted by the people in exchange of goods and services is called as.
34.  Who charges more interest compared to formal lenders?
35. What does bank do with the major portion of the deposits?
36. What are the sources of loans obtained by Salim , shoe manufacturer, to meet his expenses?
37. Swapna is unable to repay the money lender and she is caught in debt. She has to sell a part of land to pay off the debt. What is the situation she is to?
38. Whether credit would be useful or not, depends on response of what?
39. Terms of credit does not include?
40. Krishak cooperative functioning in a village near Sonpur has how many farmers as members?
41. When will be SHG eligible to avail loan?
42. Which helps the borrowers overcome the problems of lack of collateral and also they are the building blocks of organization of the rural poor?

Short answer

1. In situation of high risk, credit might create futher problems for the borrower. Explain.

(or)

Why is cheap and affordable credit important for country’s development? Explain three reasons?

(or)

            Why is there a great need to expand formal sector credit in India? Explain any three reasons.

2.  How does money solve the problem of double coincidence of wants? Explain with an example of your own.
3.  How do banks mediate between those who have surplus money and those who need money?

 (or)

            What do the banks do with the deposits which they accept from the public? Explain.

4.  Look at a ten rupee note. What is written on top? Can you explain this statement?
5.  Describe any four advantages of “Self Help Groups” for the poor.
6.  Explain any four terms of credit with examples.
7.  How money serves as a medium of exchange.

(or)

What is money? Why is modern money currency accepted as a medium of exchange?

(or)

How does the use of money make exchange of things easier? Explain with examples.

8. List some items which are kept as collateral security against loans. What happens if a borrower fails to repay the loan?
9. What does ‘terms of credit’ include?
10. ‘Problems of lack of double coincidence of wants exist in barter exchange’. Explain.
11. Explain ‘loans from cooperatives’.
12. What are the differences between formal and informal sources of credit?

                                                                               (or)

Mention any three points of distinction between formal sector loans and informal sector loans.

13. Why should credit at reasonable rates be available for all?
14. Why are transactions made in money? Explain with suitable examples.
15. What are the modern forms of money currency in India? Why is it accepted as a medium of exchange? How is it executed?

                                                                                (or)

What is currency? Explain any three features of modern Indian currency.

16. What are ‘demand deposits’? Describe any three salient features of demand deposits.
17. Why are transactions made in money? Explain with suitable examples.
18. Explain any two features each of formal sector loans and informal sector loans.
19. Manav needs a loan to set up a small business. On what basis will manav decide whether to borrow from the bank or the moneylender? Discuss.
20. In India, about 80 per cent of farmers are small farmers, who need credit for cultivation.

i. Why might banks be unwilling to lend to small farmers?

ii. What are the other sources from which the small farmers can borrow?

iii. Explain with an example how the terms of credit can be favorable for the small farmer?

iv. Suggest some ways by which small farmers can get cheap credit.

21. No individual in India can legally refuse a payment made in rupees. Why is it so?
22. Banks keep only a small proportion of their deposits as cash with themselves. Why?
23. Suppose Swapna could not repay the loan due to the failure of the crop, due to which she had to sell part of the land and repay the loan. Here, credit, instead of helping her to improve earnings, left her worse off. What is this situation called?
24. According to data of the year 2003, rich urban households took 90% of their loans from formal sources, whereas 10%from informal sources. Poor households in the urban areas took 85% of their loans from informal sources. What do these facts indicate?
25. Even when the banks are present, it is difficult for poor households to get a loan from the bank than taking a loan from informal sources? Why is it so?
26. After year or two, if a SHG is regular in savings, it becomes eligible for availing loan from the bank. In whose name loan is sanctioned and for what purpose it is mean for?
27. Why banks are willing to lend to the poor women when organized in SHGs, even though they have no collateral as such?
28.  “ In situations with high risks, credit might create further problems for the borrower”. Explain.
29. How does money solve the problem of double coincidence of wants? Explain with an example of your town.
30. How do banks mediate between those who have surplus money and those who need money?
31. The modern currency is without any use of its own as a commodity. Why is it accepted as money?
32. Why are transactions made in money? Explain with examples.
33. What are the factors of formal sector loans?
34. What are the features of informal sectors of loans?
35. Explain the inconvenience of barter system.
36. What are the functions of money?
37. Which are the two major sources of formal sectors in India? Why do we need to expand the formal sources of credit?
38. What are the functions of the reserve bank of India?
39. Why farmers in India need credit for cultivation? Which sources do they prefer and why?
40. What are demand deposits? Describe the features of demand deposits.
41. What are self-help groups? Describe in brief their functioning including their aim and importance.
42. Why do we need to expand formal sources of credit in India?
43. What is the basic idea behind the SHGs for the poor? Explain in your own words.
44. What are the reasons why the banks might not be willing to lend to certain borrowers?
45. In what ways does the reserve bank of India supervise the functioning of banks? Why is this necessary?
46. Analyze the role of credit for development.
47. Explain the role of reserve bank of India in the Indian monetary system.
48. ‘The rupee is widely accepted as a medium of exchange’ Explain.
49. What are the advantages of depositing money in the banks?
50. What are demand deposits? What are their advantages?
51. Why are demand deposits considered as money?

(or)

How do demand deposits facilitate transactions?

52. The ‘RBI plays a crucial role in controlling the formal sector loans’. Explain.

(or)

             Who supervises the functioning of banks? In what ways is the supervision done?

(or)

            Which government body supervises the functioning of formal sources of loans in India? Explain the functioning.

Long answers

1. Explain the loan activities of banks.

(or)

What do the banks do with the deposits which they accept from the public? Explain.

2. Why there is a need for credit is rural areas?  Explain.

(or)

“Cheap and affordable credit is crucial for the country’s development”. Explain.

3. Distinguish between formal and informal credit resources.

(or)

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

(or)

What are the two categories of sources of credit? Mention four features of each.

4. Explain SHGs.

(or)

What is the idea behind forming the self help groups or the SHGs? Explain the functioning of the self help groups or the SHGs.

5. Describe four major sources of credit for rural household in India.

(or)

      Describe the sources of formal and informal credit in India.

6. Why should we deposit excess money in a bank?
7. Suppose you are marginal farmer, who needs some money. You have the option to take credit either from formal or informal source. Which one you will choose? Justify.
8. Mention any three values which are reflected by the formal sources of credit.
9. Mention any four values reflected by SHG.
10.  What are the reasons why the banks might not be willing to lend to certain borrowers?
11. In what ways does the Reserve Bank of India supervise the functioning of banks? Why is this necessary?

(or)

Which government body supervises the functioning of formal sources of loans in India? Explain into functioning.

(or)

Who supervises the functioning of banks? In what ways is the supervision done?

12. Explain the inconvenience of barter – system / exchange.
13. Describe the functions of money.
14. Define bank. Also explain the functions of commercial bank.
15. Give the meaning of central bank. Describe the functions of central bank.
16. “In recent years, people have tried out some newer ways of providing loans to the poor. The idea is to organize rural poor, in particular women, into small self help groups.”