10 Class Economics Chapter 3 Money and Credit Notes
|Chapter Name||Money and Credit|
|Category||Class 10 Economics Notes|
Class 10 Economics Chapter 3 Money and Credit Notes. here we will be learn about money as a medium of exchange, modern forms of money, credit, terms of credit, credit in the formal sector in India, self-help groups for the poor etc.
Class 10 Economics Chapter 3 Money and Credit Notes
📚 Chapter = 3 📚
💠 Money and Credit💠
❇️ Money :-
🔹 Money is something that can act as a medium of exchange in transaction . In day to day transactions , goods are being bought & sold with the use of money .
❇️ Money as a Medium of Exchange :-
🔹 Money is used for several transactions. It is considered as a means of exchange, as it acts as intermediate in the exchange process.
🔹 In the early times, people used to exchange one commodity for another, depending on their requirement under the Barter System. However, exchanging goods in the barter system required a double coincidence of wants.
❇️ Double Coincidence of wants :-
🔹 When in the exchange, both parties agree to sell and buy each other commodities. It is called double coincidence of wants. In the barter system double coincidence of wants is an essential feature.
❇️ Barter System :-
🔹 When goods are directly exchanged for goods and there is no use of money. It is called barter system.
❇️ Limitations of barter system :-
- The condition of double coincidence must be fulfilled for barter.
- Difficulty in accumulating wealth or value.
- Difficult to exchange indivisible goods.
- Difficult to store things for future use (for a long time).
❇️ Forms of Money :-
- Ancient period :- Grain and cattle were used as money.
- Mediaeval period :- Metallic coins of gold, silver, copper and lead were used as money.
- Modern period :- Paper currency and coins are used as money.
❇️ Modern Forms of Money :-
- Net banking Mobile banking
- Paper Notes
- Debit Cards
- Credit Cards
❇️ Currency :-
- Before the introduction of coins, a variety of objects were used as money.
- For example, since the very early ages, Indians used grains and cattle as money.
- Modern forms of money include currency – paper notes and coins.
❇️ Currency in India :-
🔹 In India, the Reserve Bank of India issues currency notes on behalf of the Central Government.
❇️ Reserve bank of India :-
🔹 R.B.I is the central bank of India which controls the monetary policy of the country.
🔹 R.B.I supervises the activities of formal sector and keep the track of their activities.
❇️ Functions of Reserve Bank of India :-
- Issue the currency on behalf of Government of India.
- Issues guidelines regarding working culture of Bank and SHG.
- Give directions regarding terms and interest on credits.
- To provide feedback regarding monetary policies to government of India.
- RBI holds a part of the cash reserve of the bank.
❇️ Deposits with Banks :-
🔹 The other forms in which people hold money is deposits with Banks. People deposit their extra money in banks by opening a bank account.
🔹 Banks also provide interest to the people on their deposits. People also have the provision to withdraw their money when they need it.
🔹 Since this money is withdrawn on demand, hence these deposits are also called demand deposits.
❇️ Cheque Facility :-
🔹 Cheque is basically a paper instructing the bank to pay a specific amount from the person’s account to that person in whose name the cheque has been issued.
🔹 Payments can be made with the use of cheque instead of cash.
❇️ Modern Banking System :-
🔹 The modern forms of money i.e. currency and deposits are closely linked to the working of the modern banking system.
❇️ Loan Activities of Banks :-
- Banks accept deposits of the people and pay a low interest rate on these deposits.
- They keep only a small portion of deposits (in India, it is 15%) as cash. This is kept for those depositors who wish to withdraw money from their accounts.
- Rest of the deposits are given as loans by the banks. When banks give loans, they charge higher rate of interest from the people who have taken loans.
- This becomes the income of the banks.
- In this way, banks act as mediator between those who have surplus funds (the depositors) and those who are in need of funds (the borrowers).
❇️ Credit :-
🔹 Credit also called loan is an agreement in which the lender supplies to borrower money, goods or services, with the promise of future payment.
❇️ Two Different Credit Situations :-
🔶 Credit as an asset :-
🔹 During the festival season, a shoe manufacturer Salim has received an order of making shoes in bulk, within one month’s time. To complete this production, he hires extra workers and has to purchase the raw materials.
🔹 He asks the supplier to supply leather now and, promise to pay him later. Then he takes some advance payment from trader.
🔹 By the end, of the month, he is able to deliver the order, make a good profit and repay the money he had borrowed.
🔶 Credit as a debt trap :-
🔹 A farmer swapna picks up loan from a money lender to meet the expenses of cultivation.
🔹 But unfortunately the crop was hit by the pests and there was crop failure. So, she is unable to repay the loan and debt grows larger with Interest.
❇️ Different situation of loan for both Salim and Swapna :-
🔹 Loans played a positive role for Salim. He also made profit and also repaid the loan.
🔹 loan had a negative role for Swapna. She was unable to repay the loan and earn profit. She got caught in the debt trap, she had to sell the land.
❇️ How do farmers gets into debts trap?
- Failure of the crop makes loan repayment impossible.
- Downfall of crop prices also makes loan repayment impossible.
- Higher interest makes life difficult. Credit in such a condition pushes the borrowers into a situation from which recovery is painful and they get into the debt trap.
❇️ Terms of Credit :-
🔹 Terms of credit is a set of conditions under which a loan is given. It may include the mode of payment, interest rate, duration of credit and other conditions.
- Every loan agreement specifies an interest rate which the borrower must pay to the lender along with repayment of the principal.
- In addition, lender may demand collateral, i.e., as assert that the borrower owns and uses this as a guarantee until the loan is repaid.
- If the borrower fails to repay the loan, the lender has the right to sell the collateral to obtain payment.
- Terms of credit comprise interest rate, collateral and documentation requirement, and the mode of repayment.
❇️ Collateral :-
🔹 Collateral is an asset that the borrower owns (such as land, building, vehicle, live stocks, deposits with baks) and uses this as a guarantee to a lender until the loan is repaid.
❇️ The different sources of credit are :-
- Cooperative societies
- Relatives and friends
❇️ Reasons for not giving loans by the bank to some individuals or groups :-
🔹 Banks require proper and legal documentations and collateral as security against loans.
🔹 The borrowers who have not repaid previous loans, the banks might not be willing to lend them further.
🔹 Those entrepreneurs, who are going to invest in a business with high risks, the might not be willing to lend
❇️ Credit sources in India :-
🔹 There are two categories of sources of credit sector
- Formal Sector Credit and
- Informal Sector Credit.
❇️ Formal Sector Credit :-
🔹 Formal sector comprises banks and cooperative societies where credit is given with complete documentation.
🔶 features of Formal Sector Credit :-
- It provides loans comparatively at a lower rate.
- Collateral security is required to obtain loans.
- This sector is mainly supervised by Reserve Bank of India.
- It includes banks and cooperative societies.
❇️ Informal Sector Credit :-
🔹 Informal Sector may consist of money lenders, friends, traders, landowners etc.
🔶 features of Informal Sector Credit :-
- It charges comparatively high interest rate.
- Some time collateral is not needed while obtaining loan.
- It is supervised by none of the institutions.
❇️ Difference between formal and informal sources of credit :-
|Formal sector||Informal sector|
|Rate of Interest is lower.||Higher rate of Interest.|
|Collateral is must for getting loan.||Ready to give loans without any collateral too.|
|RBI supervises them.||No organization to supervise them.|
|More documentation is required. It involves many formalities.||Less documentation, less formalities.|
|Example :- Banks and co-operatives.||Examples :- Moneylender, traders, friends, retailers and so on.|
❇️ Role of R.B.I. in Formal Sectors :-
- RBI ensures that the banks give loans not just to profit making businesses but also to small cultivators and small scale industries.
- Banks also have to submit the report regarding the lending, interest rate charged on loan etc. to R.B.I.
- Banks have to maintain a minimum cash balance out of the demand deposits they have with R.B.I. R.B.I. performs this function in order to control the liquidity in market.
❇️ SELF HELP GROUP (SHG) :-
🔹 It’s basic idea is to provide financial resources for the poor through organizing the rural poor especially women into small help groups.
❇️ Works of SHG :-
- It organizes the rural poor, especially women, into small Self Help Groups.
- It collects saving of the members.
- it provides loans without collateral.
- It provides timely loans at reasonable rate of interest.
- It also provides a platform to discuss various social issue.
❇️ Grameen Bank of Bangladesh :-
🔹 Grameen Bank of Bangladesh tells one of the biggest success stories of reaching the poor to meet their credits needs at reasonable rates.
🔹 It was founded by professor Muhammad Yunus who won the nobel prize for peace in 2006.
🔹 Grameen Bank of Bangladesh in 2018 has over 9 million member in about 81,600 villages spread across Bangladesh.
🔹 The poor women have proved to be reliable borrowers, as they have started and run a variety of small income- generating activities successfully.
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