FOUNDATION MIND MAP

MONEY & CREDIT By – Shigraf Ma’am

 Barter System: Double coincidence of wants

In a Barter system, goods are directly exchanged without the

use of money.
Double coincidence of wants is an essential feature of Barter
system i.e. what a person desires to sell is exactly what the
other person wishes to buy.
In other words, both parties have to agree to sell and buy each
others commodities.
 Money-Medium of Exchange

Money is anything which is generally acceptable in the exchange

of goods or services.
Since money acts as an intermediate in this exchange process, it
is called a medium of exchange.
Money eliminated the need for double coincidence of wants.
 Money-Different forms in different times

Before the introduction of coins, a

variety of objects was used as money.
For example- Grains, Cattles etc.
Thereafter came the use of metallic
coins made of gold, silver and copper.
Modern forms of currency includes currency notes,
coins and demand deposits of Banks. A new concept of
“Crypto Currency” has also been introduced recently.
 Why money is accepted as a medium of exchange?

Modern currency is without any use of its own– not made of

precious metal, –not of everyday use like grain and cattle.
Even then it is accepted as a medium of exchange because the
currency is authorised by the government of the country.
In India, Reserve Bank of India issues currency notes on
behalf of the central government. As per Indian law, no other
individual or organisation is allowed to issue currency.
No individual in India can legally refuse a payment made in
rupees.
 Demand Deposits of Banks

People deposit their extra cash or money in the Banks by

opening a Bank account.

Bank accept the deposits and also pay an amount as interest

on the deposits.
Since the deposits in the Bank accounts can be withdrawn on
demand, these deposits are called demand deposits.

On one hand, people’s money is safe in the Bank accounts and
on the other hand, they also earns an amount as interest.
 Cheque facility against Bank deposits

Demand deposits offer a cheque facility to the account holders.

A cheque is a paper instructing the Bank to pay a specific amount
from the depositor’s account to the person in whose favour the
cheque has been issued.
Thus, cheque facility makes it possible for a person to directly
settle payments without the use of cash.
 Banks
Bank is an institution which accept deposits from the people
who have surplus funds.
Modern forms of money- currency and demand deposits, are
closely linked to the working of the modern banking system.
Banks lend the money to those borrowers who need funds for
the fulfillment of their various requirements.
 Loan activities of Banks

Banks keep only a small portion of their deposits as cash with

themselves. For example, Banks in India these days hold about
15% of their deposits as cash to pay the depositors who might
come to withdraw money from the Bank on any given day.
Banks use the major portions of the deposits to give loans on
which they charge a higher interest rate than what they give to
the depositors.
The difference between what is charged from the borrowers
and what is paid to the depositors is the main source of income
of the Banks.
 Credit - two different situations

Credit is also known as loan. It refers to an agreement

in which the lender supplies to the borrower some
money, goods or services in return for the promise of
future payment.
In one situation, credit helps to meet the ongoing
expenses of production and accordingly,
increases the earnings. Thus, the person is better
off than before.

In another situation, credit also pushes

the borrower into a debt trap.
 Crop loan

Crop production involves considerable costs on seeds,

fertilisers, pesticides, water, electricity, equipments etc.
There is a minimum stretch of 3 to 4 months between the
time when the farmers buy these inputs and when they sell
their crop.
In order to meet the expenses of crop production, farmers
usually take crop loans at the beginning of the season and
repay the loan after harvest.
 Terms of Credit
Every loan agreement specifies certain conditions which are
known as terms of credit.
Terms of credit includes interest rate, collateral, documentation
requirement, mode of repayment etc.
These terms of credit vary substantially from one credit
arrangement to another depending on the nature of agreement,
lender and the borrower.
 Collateral

Collateral is also known as security. It is an asset that the

borrower owns and use these as a guarantee to a lender until
the loan is repaid.
Ex – In Megha’s home loan-papers of new house are used as
collateral.
Collateral includes land, building, vehicle, live stocks, deposits
with Banks etc.
If the borrower fails to repay the loans, lender has the right to
sell the asset or collateral to recover her loan amount.
 Different credit arrangements - Sources of credit

Sources of credit or credit arrangements are classified into

two categories- Formal sources and informal sources.
Formal sector loan sources includes loan from Banks and
Cooperatives.
Informal sector loan sources includes moneylenders, traders,
employers, relatives and friends.
 Loan From Cooperatives

Cooperative society is a major source of cheap credit in

rural areas.
Members of the society pool their resources for cooperation
in certain areas such as farming, weaving, industrial
workers etc.
They use pooled money as collateral and obtains a large loan
from the Banks which are used to provide loans to its members
for the purchase of agricultural implements, cultivation,
agricultural trade, fishery, construction of houses etc.
Once these loans are repaid, another round of loaning takes
place.
Credit in Rural Areas
In 2012, the status of rural households credit in India
was as follows - In the formal sector :- Commercial
Banks 25%, Cooperative societies / Cooperative Banks
25%, Government agencies 1%, other institutional
agencies 5% [Total Formal sector loan was 56%].
In the informal sector → Money lender 33%, Land lords 1%,
Relatives and Friends 8% , other non-institutional agencies
2% [Total informal sector loan was 44%]
It is also important to know that in rural areas, the rich
households are availing cheap credit from formal sources
whereas the poor households are bound to take loans from
informal sources.
 Credit in Urban Areas

In urban areas, people are divided into 4 groups - Poor

household, households with few assets, well-off households
and rich households.
The credit situation in urban areas tells a different story–
Poor households:- 85% loan from informal sector and only
15% from formal sector.
Households with few assets:- 53% from informal sector and
47% from formal sector.
Well-off households:- 72% from formal sector and only 28%
from informal sector.
Rich households:- 90% from formal sector and only 10%
from informal sector.
 Formal Sector Credit Monitoring - Role of RBI

RBI supervises the functioning of formal sector loans. It ensures

whether the Banks are actually maintaining the minimum cash
balance or not.
RBI also monitors that the Banks gives loans not just to profit
making business and traders but also to small farmers, small-
scale industries and small borrowers etc.
Bank submit their periodical reports to RBI on how much they
are lending, to whom they are lending, at what interest rate they
are lending etc.
 No monitoring of informal sector credit
No agency or institution to supervise the informal sector
credit activities.
Compared to formal sector, most of the informal sector
lenders charge a much higher interest on loans. Thus, the
cost of informal sector loan is much higher.
There is no one to stop the informal lenders from using
unfair means to get their money back.
 Draw Backs of Informal Sector Credit
Much higher interest rate affects the earning of the borrower
because larger part of it is used for repayment. Example-
Shyamal in Sonpur.
Higher interest rate also mean that the amount to be repaid is
greater than the income of the borrower. This may lead to
increase in debt and debt trap. Example- Rama in Sonpur.
Higher interest also discourage the people to start a new
enterprise. High cost borrowing discourages them to take an
initiative.
Informal lenders uses unfair means to get their loan back.
Imposition of unreasonable terms of credit.
Formal Sector Credit - Why should be increased?

To enable people to grow crops, to do business, to set-up

small-scale industries etc. formal sector institutions like
Banks, cooperative societies need to lend more and more, as it
would lead to higher incomes and people could then borrow
cheaply for a variety of needs mentioned above.
Cheap and affordable credit is crucial for the country’s
development.
Should be increased particularly in rural areas so that the
dependence on informal lenders may be reduced.
It is equally important to monitor that formal sector loans are
available to everyone and not to richer households only.
 Why is it easier to take informal sector loan than the
formal sector?

Banks are not available everywhere in rural areas.

Bank loans require proper documentation and collateral while
informal lenders know the borrowers personally and they give
loan without the documentation and collateral.
In case of informal loans, the borrower can, if necessary,
approach the money lender even without repaying the earlier
loan. This is not possible in formal sector loans.
Informal sector money lenders charge very high interest rates,
keep no records of the transaction and harass the people but
even then, informal sector loaning in rural areas is greater
than formal sector due to the reasons mentioned above.
 Self-Help Groups [SHGs]
SHG is a new idea to organise rural
poor particularly women.
A typical SHG has 15 to 20
members usually belonging to one
neighbourhood who meet and save
regularly as per their capacity.
Members can take small loans from the group itself to meet their
needs on nominal interest even less than the money lender.
After a certain period, if the group is regular in savings, it
becomes eligible for availing Bank loan.
Loan is sanctioned in the name of SHG to create self-employment
opportunities for the members.
 Normally, SHG provides loan for releasing mortgaged land, for
meeting working capital needs i.e., buying seeds, fertilisers, raw
materials, housing materials, acquiring assets like sewing
machine, cattle etc. in rural areas.
 All important decisions regarding savings and loans are taken by
the members- amount of loan, purpose, interest rate, repayment
schedule etc.
Repayment of loan is followed up seriously by other members
in the group, that is why, banks are willing to lend to the poor
women SHG, even though they have no collateral as such.
 Advantage of SHG
Helps in resolving the problem of collateral.
Family loans for a variety of purposes and at a reasonable interest
rate.
Helps women to become financially self-reliant.
Regular meetings of the group provide a platform to discuss and
act on a variety of social issues such as health, nutrition, domestic
violence etc.
 Success Story of Grameen Bank of Bangladesh
Founded by Professor Mohammed Yunus in 1970- winner of Noble
prize for peace in 2006.
In 2018 – membership increased to 9 million in 81600 villages of
Bangladesh – Almost all the borrowers are women belonging to
poor sections of the society.
Women proved themselves reliable borrowers- started many small
income generating activities.
THANK YOU