Money and Credit Chapter-3, Civics Class-X ० Money - universally accepted medium of exchange of goods and services ० Credit - agreement...
Money and Credit
Chapter-3, Civics
Class-X
० Credit - agreement in which lender supplies the borrower with money, goods or services in return for the promise of future payment.
० Barter System of Exchange: A system where goods are directly exchanged without the exchange of money.
० Double Coincidence of wants: both parties in on Exchange should agree to buy and sale others commodities.what one person desire to sale is exactly what the other person desire to buy.
० Money can be easily exchanged for any commodity or service and therefore provide a crucial intermediate step to eliminate the need of D.C.W.
० Before the introduction of coins, a variety of objects was used as money.Ex- grains, cattle, metals, stones etc.
• Currency (without any use of it's own) is accepted as a medium of exchange because the currency is authorized by the government of the country.
• In India, the Reserve Bank of India issues currency notes on behalf of the central government.
• As per Indian law, no other individual or organization is allowed to issue currency.
• No individual in India can legally refuse a payment made in rupees.
० Deposits with bank
• The other form in which people hold money
is as deposits with the bank.
• Deposits Extra Money in bank accounts (Money safe with bank + interest)
• Withdraw the money as and when they require.
• Since the deposits in the accounts can be
withdrawn on demand, these deposits are
called demand deposits.
# Cheque:
० Loan activities of bank
• Banks keep only a small proportion ( eg. 15%) of their deposits as cash with themselves.
• This is kept to pay the depositors who might come to withdraw.
• Use major portion of the deposits to extend loans.
• Thus, Banks mediate between those who have surplus funds and those who need funds.
• Banks charge a higher interest rate on loans than what they offer on deposits.
• The difference between what is Charged from borrower and what is paid to depositors is their main source of income.
० Two different credit situations
• Story of Salim - shoe manufacturer, take loan from leather supplier and advance payment from trader, fullfill the promise, earns profits.
Credit therefore plays a vital and positive role in this situation.
•story of Swapna- small farmer, loan from moneylender, groundnut crop distroyed, debt grow, next year take loan, production not enough to return loan, sell part of land.
In this case Credit pushes the borrower into a situation from which recovery is very painful.
० Terms of credit:
The collateral, interest rate, documentation requirement and mode of repayment together comprises what is called the terms of credit.
1. Collateral-
• Collateral is an asset owned by the borrower and given as a guarantee or security to the lender until loan is repayed.
• It may be in the form of property, gold, vehicle, Bank deposits etc.
• If the borrower fails to repay the loan, the lender had the right to sell the Asset or collateral to obtain payment.
2. Interest rate-
• Simple or compounded and is usually calculated annually.
• Every loan Agreement specifies it and borrower must pay it to the lender along with principle.
3. Documentation requirements-
Proof of Identity, proof of Residence, salary or employment records, income tax returns, bank statements etc.
4. Mode of repayment-
Specified duration of loan and whether it will be repayed in one go or monthly installments.
० Variety of credit arrangements:
• Loans from moneylenders- high interest rates, own terms and conditions.
• Loans from traders- high interest rates, promise of selling products to them.
• Loans from employer- high interest rates, compromise with works.
• Loans from banks- low interest rates, formal terms and conditions.
• Loans from cooperatives- members pool their resources for cooperation in certain area, use pooled resources as collateral to raise funds from banks.
० Credit sources of India:
i) Formal sector
• Loans from banks and cooperatives.
• Supervised by RBI.
• Reasonable rate of interest charged: no scope of harassment
• Collateral and documentation necessary.
• Credit provided for productive purposes only.
ii) Informal sector
• Loans from money lenders, traders, friends or relatives.
• Not supervised by any Organisation. (Lender may use unfair means for recovery).
• High rate of Interest with no records of Transactions: scope of harassment.
• Collateral and documentation requirements depends upon borrower and/or lender. (Since they know each others personally)
• Provided for both productive and non-productive purposes.
० Formal and Informal Credit : Who gets What ?
• Majority of Rich household gets loan from Formal Sector.
• While formal Sector loans need to expand, it is also necessary that everyone receives these loans.
० Self- Help Groups for the Poor-
• A typical SHG has 15-20 members, usually belonging to one neighbourhood, who meet and save regularly.
• Members can take a small loans from the group itself to meet their needs.
• The group's charge on these loans but it's still less than what moneylender charge.
• Other members of the group seriously follow-up Non-payment by any one member
• After a year or two if regular savings, it becomes eligible for loan from bank.
The purpose of these loans is to create self employment opportunities for members.
• Decision regarding loan use is taken by members of the group. Like interest, duration, purpose, amount, etc.
० Advantages
• Help women become financially independent.
• Help borrower overcome the problem of collateral
• Reasonable rate of interest
० Grameen Bank of Bangladesh
• started in the 1970.
• till october 2014 it got over 8.63 M Members accross 81,390 villages Spread accross Bangladesh.
• Improved the condition of poor women of Bangladesh.
• Started by Professor Muhammad Yunus, recived Nobel peace price in 2006.
I hope this will help you.
Don't hesitate to ask (comment) any question or give any suggestion.
Thank you for visiting.
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