Class 10 Economics
Chapter 3: Money and Credit
1. Money as a Medium of Exchange
Money is a medium of exchange that is generally accepted as payment for goods and services.
Barter System
The barter system is a system in which goods are directly exchanged for other goods without using money.
Example: A farmer exchanges wheat for shoes from a shoemaker.
Double Coincidence of Wants
It refers to a situation in which both parties agree to sell and buy each other's goods at the same time.
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Farmer
Wants shoes and has wheat to exchange.
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Shoemaker
Wants wheat and has shoes to exchange.
Both must want what the other offers for the exchange to take place.
Limitation of barter: Finding someone who wants exactly what one has to offer makes exchange difficult.
Role of money: Money removes this difficulty by allowing people to sell goods to one person and purchase other goods from someone else.
2. Modern Forms of Money
A. Currency
Currency includes paper notes and coins.
In India, currency is denominated in rupees.
It is authorised by the government and accepted as a medium of exchange.
The Reserve Bank of India (RBI) issues currency notes on behalf of the Central Government, except the ₹1 note, which is issued by the Ministry of Finance.
B. Deposits with Banks
People deposit their surplus money in bank accounts for safekeeping.
Banks pay interest on deposits.
Depositors can withdraw money when required.
People can make payments using cheques and electronic transfers.
Demand deposits can be withdrawn on demand.
Why are demand deposits considered money?
Demand deposits are considered money because they can be withdrawn on demand and used directly to make payments.
C. Cheque
A cheque is a paper instructing a bank to pay a specified amount from the account of the person issuing it to another person or their account.
3. Loan Activities of Banks
Banks act as intermediaries between depositors and borrowers.
Banks accept deposits from the public.
They keep a small proportion of deposits as cash to meet withdrawal needs.
The major portion of deposits is used to provide loans.
Banks charge borrowers a higher interest rate than the rate paid to depositors.
The difference between interest earned and interest paid contributes to the bank's income.
Depositors
Deposit their savings in banks
Bank
Keeps some cash and lends the major portion of deposits
Borrowers
Use loans for farming, business and other needs
4. Credit
Credit refers to an agreement in which a lender provides money, goods or services to a borrower, who agrees to repay the amount later, usually with interest.
Credit can have both positive and negative effects depending on the borrower's circumstances.
Positive Role of Credit
Credit can increase income and support economic activities.
Example: A farmer borrows money to buy seeds and fertilisers. A good harvest enables the farmer to repay the loan and earn a profit.
Negative Role of Credit
Credit can create financial difficulties when the borrower cannot repay the loan.
Example: A farmer borrows money for cultivation, but the crop fails. The farmer may have to borrow again to repay the earlier loan, increasing the debt burden.
5. Terms of Credit
The terms of credit are the conditions under which a loan is given and repaid.
| Term | Meaning |
|---|---|
| Interest rate | The rate at which interest is charged on a loan. |
| Collateral | An asset pledged by the borrower as security against a loan. |
| Documentation | The documents required to obtain a loan. |
| Repayment period | The time within which the loan must be repaid. |
Examples of collateral: Land, buildings, vehicles and livestock.
If the borrower fails to repay the loan, the lender may recover the dues through the collateral, subject to applicable rules and procedures.
6. Formal and Informal Sources of Credit
Formal Sources of Credit
Commercial banks
Cooperative societies
These sources are subject to official regulation and supervision.
Informal Sources of Credit
Moneylenders
Traders
Employers
Relatives and friends
These sources generally operate outside the formal banking regulatory framework.
Differences Between Formal and Informal Credit
| Formal Credit | Informal Credit |
|---|---|
| Banks and cooperative societies | Moneylenders, traders, employers, etc. |
| Subject to official regulation | Generally lacks equivalent formal banking regulation |
| Interest rates are often lower | Interest rates may be very high |
| Documentation is generally required | Documentation may be limited |
| Greater regulatory protection | Greater risk of exploitation |
7. Role of the Reserve Bank of India (RBI)
The Reserve Bank of India is India's central bank.
It supervises the functioning of formal sources of credit.
It monitors whether banks maintain the required cash balances.
It collects information about banks' lending activities and deposits.
It regulates and supervises the banking system.
It helps ensure that formal credit reaches different sectors of the economy.
8. Why Should Formal Sources of Credit Be Expanded?
Formal loans generally offer more transparent terms.
They reduce dependence on moneylenders.
They help farmers and small businesses obtain affordable loans.
They reduce the risk of exploitation through excessive interest rates.
Affordable credit supports production, employment and economic development.
9. Self-Help Groups (SHGs)
Self-Help Groups are small groups, often consisting of 15–20 members, who regularly save money and provide loans to members from their collective savings.
Working of SHGs
Members save a fixed amount regularly.
The collected savings are used to provide loans to members.
The group decides the loan amount, purpose and repayment terms.
After functioning regularly, the group may become eligible for a bank loan.
Advantages of SHGs
Provide credit to poor households.
Reduce dependence on moneylenders.
Encourage saving habits.
Promote women's financial independence.
Improve access to banking facilities.
Help members obtain loans without individual collateral in many group-lending arrangements.
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