JAC Class 10 Social Science Notes Economics Chapter 3 Money and Credit

JAC Board Class 10 Social Science Notes Economics Chapter 3 Money and Credit

→ Money as a Medium of Exchange

  • A person holding money can exchange it for any commodity or service that he or she might want.
  • Thus everyone prefers to receive payments in money and then exchange the money for things that they want.
  • Both parties have to agree to sell and buy each other’s commodities. This is known as Double Coincidence of Wants.
  • What a person desires to sell is exactly what the other wishes to buy.
  • In a barter system where goods are directly exchanged without the use of money, the Double Coincidence of Wants is an essential feature.
  • In an economy where money is in use, by providing the crucial intermediate step it eliminates the need for Double Coincidence of Wants.
  • Money acts as an intermediate in the exchange process. It is called a medium of exchange. This is known as Barter System.

→ Modern Forms of Money

  • Money acts as a medium of exchange in transactions.
  • Before the introduction of coins, a variety of things were used as money.
  • For example, since the very early ages, Indians used grains and cattle as money.

JAC Class 10 Social Science Notes Economics Chapter 3 Money and Credit

→ Currency

  • Modem forms of money include currency – paper notes and coins.
  • Money 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 government of India.
  • As per Indian law, no other individual or organization is allowed to issue currency.
  • No individual in India can legally refuse payment made in rupees.

→ Deposits with Bank

  • The other form in which people hold money is ‘deposits with the bank’.
  • People deposit money with the banks by opening a bank account in their name.
  • Banks accept deposits and also pay an amount as interest on the deposits.
  • People also have the provision to 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  • Since the deposits in the accounts can be withdrawn on demand, these deposits are called demand deposits.
  • Some payments are made by cheques instead of cash. For payment by cheque, the buyer who has an account with the bank, prepares a cheque for a specific amount.
  • A cheque is a paper instructing the bank to pay a specific amount from the holder’s account to the person in whose name the cheque has been issued.
  • The facility of cheque against demand deposits makes it possible to directly settle payments without the use of cash.
  • Since demand deposits are accepted widely as a means of payment, along with currency, they constitute money in the modem economy.
  • But for the banks, there would be no demand and no payments by cheques against these deposits. The modem forms of money – currency and deposits – are closely linked to the working of the modem banking system.

→ Loan Activities of Banks

  • Banks keep only a small proportion of their deposits as cash with themselves.
  • This is kept as a provision to pay the depository who might come to withdraw money from the bank on any given day.
  • Since, on any particular day, only some of its many depositors come to withdraw cash, the bank is able to manage with this cash.
  • Banks use the major portion of the deposits to extend loans to the individuals for their requirements.
  • There is a huge demand for loans for various economic activities.
  • Banks mediate between those who have surplus funds and those who are in need of these funds.
  • Banks charge a higher interest rate on loans than what they offer on deposits.
  • The difference between what is charged from the borrowers and what is paid to the depositors is their main source of income.

→ Terms of Credit

  • Every loan agreement specifies an interest rate which the borrower must pay to the lender along with the repayment of the principal amount, lenders may demand collateral against the loan.
  • Collateral is an asset that the borrower owns and uses this as a guarantee to a lender until the loan is repaid.
  • The interest rate, collateral, documentation requirement, and the mode of repayment is called the terms of credit.

→ Formal Sector Credit in India

  • People obtain loans from various sources.
  • The various types of loans can be grouped as formal sector and informal sector loans.
  • Between these two sectors, former sector includes loans from banks and cooperatives.
  • The informal lenders include moneylenders, traders, employers, relatives and friends, etc.
  • The Reserve Bank of India supervises the functioning of formal sources of loans.
  • For instance, we have seen that the banks maintain a minimum cash balance out of the deposits they receive.
  • The RBI monitors the banks in actually maintaining a cash balance.
  • Periodically, banks have to submit information to the RBI on how much they are lending, to whom, at what interest rate, etc.
  • There is no organization that supervises the credit activities of lenders in the informal sector.
  • They can lend at whatever interest rate they choose.
  • There is no one to stop them from using unfair means to get their money back.
  • Compared to the formal lenders, most of the informal lenders charge a much higher rate of interest on loans.
  • Thus, the cost to the borrower of informal loans is much higher.
  • The higher cost of borrowing means that, a large part of the earnings of the borrowers is used to repay the loans.
  • Cheap and affordable credit is crucial for the country’s development.

JAC Class 10 Social Science Notes Economics Chapter 3 Money and Credit

→ Formal and Informal Credit

  • 85% of the loans taken by the poor households in the urban areas are from informal sources.
  • Urban households take only 10% of loans from informal sources, while 90% from formal sources.
  • The rich households avail a cheap credit from the formal sources whereas the poor households have to pay a large amount of borrowing.
  • The formal sources still meet only about half of the total credit needs of the rural people.
  • The remaining credit needs are fulfilled by the informal sources.
  • Thus, it is necessary that banks and cooperatives increase their lending particularly in the rural areas so that the dependence on informal sources of credit reduces.
  • While formal sector loans need to expand, it is also necessary that everyone receives these loans.
  • It is important that the formal credit is distribute^ more equally so that the poor can benefit from the cheaper loans.

→ Self-Help Groups for the Poor

  • Poor -households are still dependent on informal sources of credit.
  • Banks are not present everywhere in rural India.
  • Even when they are present, getting a loan from a bank is much more difficult than getting a loan from informal sources.
  • The absence of collateral is one of the major reasons which prevents the poor from getting bank loans.
  • Informal lenders such as moneylenders, know the borrowers personally and are often willing to give a loan without collateral.
  • However, the moneylenders charge very high rates of interest, keep no records of the transactions and harass the poor borrowers.
  • In recent years, people had tried out some newer ways of providing loans to the poor like Self Help Groups (SHGS), Grameen Banks, etc.

JAC Class 10 Social Science Notes

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