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Social Sciences: Class 10 (Part 2) — Chapter 3: Money and Credit

3.1 Money as a Medium of Exchange

The use of money spans a very large part of our everyday life. It acts as an intermediary in transactions, eliminating the difficulties of direct exchange.

3.2 Modern Forms of Money

Modern forms of money include currency (paper notes and coins) and bank deposits.

3.2.1 Currency

  • Modern currency is not made of precious metals (like gold, silver, copper) and has no use of its own.
  • It is accepted as a medium of exchange because it is authorised by the government of the country.
  • In India, the Reserve Bank of India (RBI) issues currency notes on behalf of the Central Government.
  • By law, no other individual or organisation is allowed to issue currency, and the rupee is widely accepted as a legal medium of payment that cannot be refused in settling transactions.

3.2.2 Deposits with Banks

  • People hold extra cash as deposits with banks by opening a bank account in their name.
  • Banks accept deposits and pay an interest rate on them, keeping the money safe.
  • Demand Deposits: Deposits in bank accounts that can be withdrawn on demand.
  • Cheque: A paper instructing the bank to pay a specific amount from the person's account to the person in whose name the cheque has been issued. It allows direct settlement of payments without using cash.
3.3 Loan Activities of Banks

Banks act as mediators between depositors (who have surplus funds) and borrowers (who need funds).

3.4 Two Different Credit Situations

Credit (Loan) refers to an agreement in which the lender supplies the borrower with money, goods, or services in return for the promise of future payment.

3.5 Terms of Credit

Every loan agreement specifies certain conditions that the borrower must fulfill, collectively known as the terms of credit.

3.6 Variety of Credit Arrangements

Different people in rural areas obtain credit from various sources depending on their economic status:

3.7 Formal Sector Credit in India

Loans can be grouped into formal and informal sectors.

3.7.1 Formal vs. Informal Sector

  • Formal Sector: Includes loans from banks and cooperatives. Supervised by the Reserve Bank of India (RBI). RBI ensures banks maintain cash balance and lend to small cultivators/borrowers, not just profit-making businesses.
  • Informal Sector: Includes moneylenders, traders, employers, relatives, and friends. There is no supervising organisation. They charge very high interest rates, leading to higher cost of borrowing and potential debt traps.

3.7.2 Who Gets What?

  • Rich households primarily avail cheap credit from formal sources (e.g., $83\%$ of loans for rich urban households are formal).
  • Poor households depend heavily on informal sources (e.g., $54\%$ of loans for poor urban households are informal).
  • Key Requirements for Development:
    1. Banks and cooperatives must expand formal lending in rural areas to reduce dependence on informal sources.
    2. Formal credit must be distributed more equally so that the poor can benefit from cheaper loans. Cheap and affordable credit is crucial for the country's development.
3.8 Self-Help Groups (SHGs) for the Poor

SHGs help poor borrowers, especially women, overcome the lack of collateral and access formal credit.