Money and Credit

Notes of Ch 3 Money and Credit| Class 10th
Economics
Money as a medium of exchange
• Money is an item which is used as a medium of exchange. In modern economy, money is work as
an intermediary. It is used as a medium of exchange for goods and services. It is also used for
payment of debts.
• Introduction of money replaced the batter system. Before the introduction of money, Indians
used grains and cattle as money. In a barter system, selling and purchasing of goods and services
was done with “double coincidence of wants” i.e by fulfilling mutual wants without the use of
money. In this system goods and services was exchanged for another goods and services. It was
also known as CC economy i.e commodity for commodity economy.
Modern form of money

(i) Currency
• Modern forms of money include currency — paper notes and coins. The modern coins
are not made with the precious metals like gold, silver. The real values of the modern
coins are less than its face value. Currency notes are also used as a medium of exchange
in modern economy. The currency notes are made with paper. The real values of the
currency notes are less than its face value.
• The currency is authorized by the government of the country. So, it is used as a

medium of exchange and accepted by the others. In India, Reserve bank of India has
authority to issue currency notes on behalf of the central government. In India, no
individual can legally refuse to accept the rupees issued by the Reserve bank of India.
(ii) Deposits with Banks

(ii) Deposits with Banks are also a form of money. A person can deposit in the bank by
opening an account on his/her name. People need only some money at a point of time. So,
people can deposit extra money and earn extra money, which is given on money already
depositing in bank.
• A facility of payment through cheque is also provided by the bank to their customers.
Cheque work as an instrument for payment which is made by the paper. A person can
directly transfer money to another person through cheque rather than in cash.
Loan activities of bank
• Bank work as mediator between the depositors and the borrowers. People deposit their
money in bank and get some rate of interest as extra income. Banks hold only some
percentage of their deposit in bank.
A major portion of the deposited money is provided to those people who are needy of
money for economic activities.In this case, money is provided as a loan with a higher rate
of interest. The difference between interest on borrowing money and the interest of
deposited money is the income for the bank.
Two different credit situations
• Credit is an agreement in which is created when a person gives money and goods to the
needy person with the promise of to repay that with some rate of interest.
There are two types of credit situation
(i) In the first situation, a person borrows money for production activities with the
promise to repay the loan at the end of the year when production work will be
completed. And at the end of the year, he/she makes a good profit from production
activities and he/she is able to pay the amount of loan. Therefore, that person becomes
better off than before.
(iii) In the second situation, a person borrows money for production activities with the
promise to repay the loan at the end of the year when production work will be
completed. And at the end of the year he/she unable to repay the loan due to loss in
production. For this term, he/she come under the situation of debt trap. Therefore, that
person becomes worse off than before.
Terms of credit
• The interest rate, collateral and some documents fulfill the requirements of the terms of
credit. Interest rate is specified when a lender provides loan to the borrowers. A
borrower will have to repay the amount taken from the lenders with the amount of
interest. In some case, lenders may demand collateral against loans.
• Collateral is an asset of the borrowers which is given to the lenders as security for the
specified period. A lender can use the assets which are held by him as security until the
amount of loan is repaid. The lender has right to sell the assets or collateral when the
borrower fails to repay the amount of loan in a specified period.
(iv) Formal sector credit in India
• There are two types of sources of credit in an economy.
(i) Formal sector

(ii) Informal sector
• Formal sector
In the formal sector, loans from banks and cooperatives are included.
• Informal sector
In the Informal sector, loans from moneylenders, traders, employers, relatives and friends are
included.
As we know that major portion of the deposited money is provided to those people who are needy of
money for economic activities. In India Reserve bank of India is supervised the functioning of loan
activities in formal sectors. In India, the rate of interest in informal sector is greater than the rate of
interest in formal sector. Rate of interest in formal sector is supervised by the legal authorities.
In the Informal sector, the rate of interest is supervised by moneylenders, traders, employers who are
provided money. The rate of interest is varying from person to person. There is no organization for
supervising loan in informal sector. Lenders can use any method to get back their money from the
borrowers. Sometimes, the incomes of the borrowers become less compare than the amount which has to
pay due to the high rate of interest.
In this chart, we can see sources of credit in rural areas are mostly dependent on professional and agriculture
moneylenders in case of informal sources of loan. For the development of a country, cheap and affordable credit
is crucial. Therefore, the government should facilitate formal sources of credit basically in rural areas.
Self-help groups for the poor
• Facilities of banks are not available in all rural areas. So, the poor are dependent on informal sector for
borrowing loan. The poor have to pay a high rate of interest to the moneylenders. It is difficult to borrow loan
from the bank. Because of the absence of the collateral and documents. And documents and collateral are
required for a bank loan. Informal lenders like, moneylenders are often willing to give a loan without collateral
because they personally knew the borrowers.
• An organisation constituted to collect the savings of the poor which is known as self-help group. The aim of the
organisation is to lend loan at less rate of interest compared to the rate of interest specified by the moneylenders.
A self-help group has 15 – 20 members. Savings vary from member to member i.e Rs. 25 to Rs. 100 depending
on the ability of the person to save.
The organisation also provides self-employment opportunity for the member by the way of sanctioning the
group. For example, small loans are provided to the members for releasing mortgaged land, for meeting working
capital needs, for housing materials, for acquiring assets. There is also a group for repayment of loan. In case of
any non-repayment by the one member is followed by the other member of the organisation.

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Notes of Ch 3 Money and Credit| Class 10th

Modern form of money

• The currency is authorized by the government of the country. So, it is used as a

(ii) Deposits with Banks

Loan activities of bank

Two different credit situations

(i) Formal sector

Self-help groups for the poor

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