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Money and credit
Barter system: A system where goods are directly exchanged without the use of money.
Double coincidence of wants: It means that the buyer and seller agrees to buy and sell each other
commodities. Double coincidence of want is an essential feature of Barter system.
Money as medium of exchange:
A person holding the money can easily exchange it for any goods or service. Money by providing the crucial
intermediate step eliminates the need for double coincidence of want. Since money acts as an intermediate in
the exchange process , it is called a medium of exchange.
Before introduction of coins variety of objects were used as coins. Indians used grains and cattle as coins. The
metallic coins of gold ,silver and copper were introduced later.
Modern form of money includes paper notes and coins. Modern currency do not have any direct use of its own,
still it is accepted as a medium of exchange
Currency is authorized by the government of the country. In India RBI issues currency notes on behalf of
the central government.
No other individual or organization is allowed to issue currency.
Law legalizes the use of rupee as a medium of payment that cannot be refused in settling transaction in
India. Hence rupee is widely accepted as a medium of exchange.
Deposits
Money given to the bank for which bank pays interest. It is a way of safeguarding the money and earning
interest.
Demand deposit is when in which money can be withdrawn on demand, any time people require.
Cheque is a mode of transaction. In this, a payer who has an account with the bank makes out a check for a
specific amount from his own account to the person in whose name the cheque has been made. A cheque has
following specifications:
i) Date ii) Account number iii) Branch code iv) Cheque number v) Other coding used by banks.
Since demand deposit is accepted widely as a means of payment along with currency they constitute
money in the modern economy.
Loan Activities of Bank
Bank keeps small portion of total deposit as cash with them. In India these days banks keep 15% of total deposit
as cash with them. It is kept as contingency to pay to some of the depositor who would come to withdraw cash.
Bank use the major portion of the deposit to extend loans for various economic activity.
Bank act as mediator b/w those who have surplus money (depositors) and those who are in need of these fund
(borrower). The difference b/w the interest rate bank charge to the borrower and the rate they pay to the
depositor is the main source of income for Banks.
Credit
Credit refers to the money available for a client to borrow or an agreement in which the lender supplies the
borrowers with money, goods or services in return for the promise of future payment.
If person borrows credit, do a good business, earn profit and pays off the loan then this system of credit is
fruitful for him. But for some reason if profit is not earned then this burrowing will result in indebtedness and
situation will further grim. The situation in which it become painful for borrower to pay back the credit is called
debt trap.
In rural areas the main demand for credit is for crop production. Crop production involves considerable cost on
seeds, fertilizers, pesticides, water, electricity, repair of equipment etc.
Terms of credit
Every loan agreement specifies an interest rate at which interest has to be paid back along with Principal.
Lenders demand collaterals (security ) against loans. Collaterals is the asset that the burrower owns, like
land, building, livestock, vehicles, deposits with banks, and uses it as guarantee until the loan is paid back. If
borrower fails to repay the loan then lender has the right to sell the collateral and obtain payment.
Interest rate, collaterals & documentation required, and mode of repayment together comprise terms of credit.
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Formal sector credit
Former sector loan includes loan from Banks and cooperatives. Informal sector loans include
loan from money lenders, traders, employers, relatives etc. Formal sector meets only half the total credit need
of the rural people.
RBI supervises the functioning of formal sector loans.
RBI monitors the bank in actually maintaining minimum cash balance out of the deposit they receive.
RBI checks that the bank gives loan not only to businessmen and traders but also to poor
farmers, small scale industry, small borrowers etc.
Bank have to submit report to RBI as to whom they are dealing with, how much they are
lending, at what interest rate.
There is no such regulation in informal sector. Most of the informal lenders charge very high rate and follow
unfair means.

Higher cost of borrowing means a large part of the earning of the borrower is used to repay the loan.
In some cases the interest to be paid back may be higher that the income. This will lead to debt- trap.
Bank and cooperative society need to lend more.
This will lead to higher income
They could grow crop, do business, set up small scale industry, do trading of goods etc
This will save them from high rates and unfair means in informal loan.
Borrowers will be saved from debt-traps.

Self help groups
Poor household are still dependent on informal source of credit bcoz
Banks are not present every year in rural India
Getting a loan from Bank is much more difficult that borrowing from informal source bcoz they require
proper documents and collaterals.
Informal lenders often knows the borrowers personally and often are ready to give load without
collaterals.
Bcoz of high rates and harassment by money lenders, people have tried out a innovative way of providing , loans
to the poor. The idea to organize rural poor into small self help groups( SHG) and collect their savings.
A typical SHG has 15-20 members, usually belonging to one neighborhood, who meet and save regularly.
Saving per member varies from Rs 25-100 depending upon their ability to save.
Members can take small loans from the group itself to meet their needs. Group charges interest but is
still less than what money lenders charges.
If the group has saved enough, it becomes eligible for taking loan from the bank. Loan is sanctioned in
the name of the group to improve their employment facility. Thus SHG overcome the problem of the
lack of collateral.
SHG not only makes rural people self reliant but the regular meetings of the group provides platform
form discuss and act on variety of social issues.
Quick Check
1. Brief on the following:
i) Money ii) barter system iii) Double coincidence of want iv)Medium of exchange v) Modern form of money vi)
Deposit vii) Cheque viii) RBI ix) Credit x) Collateral Xi) SHG
2. Why money as a medium of exchange is widely accepted?
3. What is cheque ? What are specifications on a Cheque?
4. What is Credit? What are its terms?
5. How does bank earn profit?
6. What are formal and informal sectors of credit? What role RBI plays in formal sector of credit?
7. Banks and cooperatives need to lend more. Why?
8. Cheap and affordable credit is crucial for countries development? Elucidate.
9. Explain the concept and advantage of SHG.