Class 10 Economics ‘Money and Credit Chapter Notes & Revision

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Class 10 Chapter Notes: Money and Credit

Money as a Medium of Exchange

1. Definition and Role of Money:
   • Money is a crucial part of everyday life, facilitating transactions for goods and services.
   • It acts as a universal medium to exchange goods and services, eliminating the complexities of direct barter trade.
2. Advantages of Money:
   • Ease of Exchange:
     • A person holding money can exchange it for any desired commodity or service.
     • This eliminates the need for direct barter, where two parties must have mutual wants.
   • Flexibility:
     • Money allows transactions without the immediate need for an exchange of goods or services.
     • Promises to pay money later also simplify transactions.
3. Challenges in a Barter System:
   • Double Coincidence of Wants:
     • For a successful barter exchange, both parties must want what the other is offering at the same time.
     • Example: A shoe manufacturer wanting wheat must find a wheat farmer who simultaneously needs shoes.
   • Inflexibility:
     • Without money, direct trade limits the scope of exchange, making it more cumbersome and inefficient.
4. How Money Solves the Problem:
   • Money eliminates the need for double coincidence of wants.
   • It acts as an intermediary in the exchange process.
   • Example: A shoe manufacturer can sell shoes to any buyer, receive money, and then purchase wheat or any other commodity of choice.
5. Key Concept:
   • Money serves as a medium of exchange, making transactions smoother and the economy more efficient.

Modern Forms of Money

1. Evolution of Money:
   • Early forms of money included objects like grains and cattle.
   • Later, metallic coins made of gold, silver, and copper were used.
   • Modern money has evolved into currency and bank deposits.
2. Currency:
   • Definition: Modern currency includes paper notes and coins.
   • Characteristics:
     • Unlike earlier forms of money, modern currency is not made of valuable metals.
     • It has no intrinsic value or everyday use.
   • Government Authorization:
     • Accepted as a medium of exchange because it is authorized by the government.
     • In India, the Reserve Bank of India (RBI) issues currency on behalf of the central government.
     • Indian law mandates that the rupee is the legal medium of payment and cannot be refused in transactions.
3. Bank Deposits:
   • Usage: People deposit surplus money in bank accounts for safekeeping and to earn interest.
   • Demand Deposits:
     • Deposits that can be withdrawn on demand.
     • These deposits act as money due to their wide acceptance as a medium of exchange.
   • Cheque Payments:
     • A cheque is a written instruction to the bank to transfer a specific amount from the account holder to another person.
     • This eliminates the need for cash transactions.
4. Role of Banks:
   • Banks enable demand deposits and facilitate payments through cheques.
   • The functioning of modern forms of money, such as currency and bank deposits, relies heavily on the banking system.
5. Modern Money in the Economy:
   • Currency and demand deposits together constitute money in the modern economy.
   • Demand deposits provide the convenience of direct payments without cash and are widely accepted as a means of payment.

Loan Activities of Banks

1. Role of Banks in Utilizing Deposits:
   • Banks accept deposits from the public and use a portion of these deposits to extend loans.
   • Cash Reserve:
     • Banks keep only a small percentage (around 15% in India) of total deposits as cash.
     • This cash reserve is maintained to meet daily withdrawal demands from depositors.
2. Loan Mechanism:
   • Major Use of Deposits:
     • A significant portion of deposits is used to provide loans to individuals and businesses for various economic activities.
   • Mediation Role:
     • Banks act as intermediaries between:
       • Depositors: Those with surplus funds.
       • Borrowers: Those in need of funds.
   • Economic Importance:
     • Loans drive economic activities by supporting investments, businesses, and personal needs.
3. Earnings of Banks:
   • Banks charge a higher interest rate on loans compared to the interest paid on deposits.
   • The interest rate difference serves as the primary source of income for banks.
4. Risks in Banking:
   • If all depositors demand their money simultaneously, banks may face a liquidity crisis since only a fraction of deposits is kept as cash.

Two Different Credit Situations

1. Definition of Credit:
   • Credit refers to an agreement where the lender provides money, goods, or services to the borrower in exchange for a promise of future repayment.
2. Case Study 1: Salim (Positive Credit Impact)
   • Scenario: Salim, a shoe manufacturer, receives a large order but needs funds for raw materials and labor to complete it.
   • Sources of Credit:
     • Advance payment from the trader for part of the order.
     • Deferred payment agreement with the leather supplier.
   • Outcome:
     • Credit helps Salim meet working capital needs, complete production on time, and earn a profit.
     • Salim successfully repays his debts and benefits from the transaction.
   • Role of Credit: It plays a positive role by supporting production, enhancing earnings, and improving financial stability.
3. Case Study 2: Swapna (Negative Credit Impact)
   • Scenario: Swapna, a small farmer, borrows money from a moneylender for crop production.
   • Challenges:
     • Her crop fails due to pests, despite additional investment in pesticides.
     • Unable to repay the loan, she is forced to take another loan, leading to escalating debt.
   • Outcome:
     • Swapna falls into a debt trap, eventually selling part of her land to repay the loan.
     • Credit worsens her financial position due to unforeseen risks.
   • Role of Credit: It has a negative impact, leaving the borrower worse off and causing long-term financial strain.
4. Key Insights:
   • Credit can be beneficial or harmful, depending on the circumstances.
   • Factors influencing the outcome of credit:
     • Risk Management: Dependence on variables like market demand, climate, and crop success.
     • Support Systems: Lack of institutional support can exacerbate the risks of credit, especially in rural areas.

Terms of Credit

1. Definition of Terms of Credit:
   • Terms of Credit include the following components in a loan agreement:
     • Interest Rate: The percentage charged on the principal amount borrowed.
     • Collateral: An asset owned by the borrower, used as security against the loan.
     • Documentation: Papers or proof required by the lender to evaluate the borrower’s creditworthiness.
     • Mode of Repayment: The schedule and method by which the loan is to be repaid (e.g., monthly instalments).
2. Collateral:
   • Definition: An asset pledged by the borrower to secure the loan.
   • Purpose: If the borrower fails to repay, the lender has the right to sell the collateral to recover the loan amount.
   • Examples: Land titles, bank deposits, livestock, vehicles, or property documents.
3. Example: Megha’s Housing Loan:
   • Loan Details:
     • Amount: ₹5,00,000
     • Interest Rate: 12% annually
     • Duration: 10 years
     • Documentation: Employment records and salary proofs
     • Collateral: Property papers of the new house
     • Mode of Repayment: Monthly instalments
   • Key Insight: Megha’s new house papers are held by the bank as collateral until the full repayment of the loan.
4. Variation in Terms of Credit:
   • Terms of credit differ based on:
     • Type of lender (e.g., banks, moneylenders).
     • Nature of the borrower (e.g., individual, business).

Formal and Informal Credit in India

1. Sources of Credit in Rural India (Graph 1)

• Commercial Banks: Largest share (51%) of rural credit comes from commercial banks.
• Cooperative Banks and Societies: Contribute 10% of rural credit.
• Moneylenders: Provide 23% of credit, often at high-interest rates.
• Relatives and Friends: Account for 7%.
• Other Formal Agencies: 5%.
• Landlords and Other Informal Agencies: Small contributions (1% and 3%, respectively).

2. Formal vs Informal Credit (Graph 2)

• Urban Poor Households:
  • Depend heavily on informal sources (54%).
  • Only 46% of loans are from formal sources.
• Households with Few Assets:
  • 62% formal credit, 38% informal credit.
• Well-Off Households:
  • 73% formal credit, 27% informal credit.
• Rich Households:
  • 83% formal credit, 17% informal credit.

3. Differences Between Formal and Informal Credit

• Formal Credit:
  • Includes banks and cooperative societies.
  • Supervised by the Reserve Bank of India (RBI).
  • Offers lower interest rates, increasing borrower income.
  • Requires collateral, often limiting access for the poor.
• Informal Credit:
  • Includes moneylenders, traders, employers, relatives, etc.
  • Not regulated, and lenders can charge high-interest rates.
  • Often leads to debt traps for the poor.

4. Importance of Credit at Reasonable Rates

• Affordable credit:
  • Encourages income growth and productivity.
  • Enables borrowers to grow crops, start businesses, or trade.
  • Reduces dependence on exploitative informal loans.
  • Vital for the country’s development.

5. Challenges in Supervising Informal Credit

• Informal lenders operate without oversight.
• High interest and unfair practices are common.
• Supervising them would be difficult due to their vast and unorganized network.

6. Why Rich Households Get More Formal Credit

• Richer households have:
  • Collateral like land, property, or savings to secure loans.
  • Easier access to formal institutions like banks.
• Poor households often lack collateral and are forced to rely on informal lenders.

7. Solutions to Reduce Informal Borrowing

• Increase the reach of banks and cooperative societies, especially in rural areas.
• Ensure equitable access to formal credit for poor households.
• Promote financial literacy to help people access cheaper loans.

SELF-HELP GROUPS FOR THE POOR

Key Features of SHGs:

1. Structure of SHGs:
   • Comprised of 15–20 members, primarily from the same neighborhood.
   • Members save small amounts regularly (e.g., Rs 25–100 or more).
   • Savings are pooled together to provide small loans to members.
2. Loan Management:
   • The group decides loan-related matters such as purpose, amount, interest rate, and repayment schedule.
   • Loans are provided to meet various needs: working capital, asset purchases, housing, etc.
   • Interest rates are lower than those charged by informal moneylenders.
3. Bank Linkages:
   • After consistent saving practices for a year or two, SHGs become eligible for bank loans.
   • Banks lend in the name of the group, ensuring collective responsibility for repayment.
4. Advantages:
   • Provides timely credit at reasonable rates without the need for collateral.
   • Empowers women financially and socially.
   • Offers a platform for discussing broader social issues like health, nutrition, and domestic violence.
5. Collective Responsibility:
   • Any default by a member is addressed by the group, ensuring better repayment rates.
   • This makes SHGs a reliable borrowing group for banks.