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3. Money and Credit

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Evolution of Money

How has money evolved over a period of time?

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How has money evolved over a period of time?

Money
• Money is a medium of exchange because it serves as an intermediary in the exchange process.
• Many of our daily transactions are purchase or sale of goods and services using money.
• Money is used in exchanges because money can be traded for any goods or services.

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How has money evolved over a period of time?

Double coincidence of wants

• In the barter system, goods and services are exchanged for other goods and services.
• When each of two parties to a transaction agrees to buy the other's goods or services, this a double coincidence of wants.
• The need for a double coincidence of wants is a limitation of the barter system.

Money as a Medium of Exchange

What are the modern forms of money?

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What are the modern forms of money?

Currency
• Currency in the form of paper notes and coins is a modern form of money.
• Modern coins are not made of precious metals such as gold or silver. Paper is used to make currency notes.
• The true worth of modern coins and notes is less than their face value.
• The currency is authorised by the country's government for use as a means of exchange and must be accepted by payees.
• The Reserve Bank of India has the right to issue Indian currency on behalf of the Indian government.
• The law makes the Rupee a legal tender that cannot be refused in settling transactions in India.
• Thus, the rupee is widely accepted as a medium of exchange in India.

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3. Money and Credit

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What are the modern forms of money?

Deposits with banks

• A person can make a deposit in a bank by opening an account in his or her name.
• Customers can deposit their extra funds in the bank and withdraw money as and when they need it.
• Banks receive deposits and pay interest on those deposits. That means depositors receive additional money as payment of interest on their deposited
money.
• Deposits in bank accounts are known as demand deposits because they can be withdrawn at any time, on demand.
• Banks also offer customers the option of making payments by cheques.
• A cheque is a paper that instructs the bank to pay a certain amount from a person's account to the person in whose name the cheque is issued.

Loans and Credit

What are the terms of credit?

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What are the terms of credit?

Loan activities of banks

• The bank acts as a mediator between the depositors and the borrowers.
• People deposit their excess funds in a bank and receive interest on them as an additional income on their savings.
• Banks keep 15 per cent of their deposits with themselves as cash to pay the depositors who might come to withdraw money from the bank.
• The major portion of the deposits is used by the banks to extend loans to persons in need of funds for economic activity.
• Banks lend the depositors’ money as loans at a higher interest rate than they pay on the deposits.
• The difference between the interest earned on loans and the interest paid on deposited money is the bank's profit.

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What are the terms of credit?

Two different credit situations

o Credit is an arrangement in which a person agrees to lend money or supplies to an individual in exchange for the promise to repay it at a certain rate of interest.
o There are two kinds of credit situations:
• Suppose a person borrows money for manufacturing activities with the commitment to repay the loan at the end of the year.
• In one type of credit situation, at the end of the year, the borrower has made a profit from operations and is able to repay the loan.
• Thus, credit plays an important and positive role in this situation.
• In the other situation, at the end of the year, the borrower is unable to repay the loan due to business losses or lower profits than expected.
• The borrower may try to improve the business, sell the business, repay the loan out of other assets or negotiate an extension.
• But the borrower may fall into a debt trap and will be worse off than before.
• In this case, credit forces the borrower into a situation from which recovery is extremely difficult.

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What are the terms of credit?

Terms of credit
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• The interest rate, collateral and documentation required to receive loans all meet the terms of credit requirements.
3. Money and Credit
• When a lender gives a loan to a borrower, the interest rate is specified.
• A borrower is required to repay the money borrowed from the lenders and a certain amount of interest.
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• Lenders may demand collateral assets for some loans.
• Collateral is one of the borrowers' assets that is placed with the lender as security against default.
• It can include assets such as land, building, vehicle, livestock or deposits with banks.
• The lender can utilise the assets held as collateral until the loan is repaid in full.
• When a borrower fails to repay a loan, the lender has the right to sell the assets or collateral.

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What are the terms of credit?

Formal and informal credit sectors

o Formal credit sector
• Banks and cooperatives are part of the formal credit sector, and the RBI oversees their operations. The Reserve Bank of India (RBI) ensures that banks
maintain a minimum cash reserve to pay depositors.
• It also ensures that banks provide loans to sound economic enterprises with the ability to repay. Government policy requires banks to make loans to small
farmers, small scale industries, small borrowers, and other needy groups. Banks are required to regularly report their activities to the RBI.
• Besides banks, the other major source of cheap credit in rural areas are cooperative societies such as farmers cooperatives and weavers cooperatives.
o Informal credit sector
• Moneylenders, traders, employers, family and friends are all part of the informal credit sector.
• There is no regulation of their credit operations.
• They can charge any interest rate they want.
• There is no regulation of the terms of credit, which may be exploitative and unethical.
o Banks and cooperatives must increase their lending, particularly in rural regions, in order to lessen dependence on informal sources of credit.

Self Help Group

What are self help groups of the poor?

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What are self-help groups of the poor?

Self-help groups
• A self-help group is an organisation made by and for the rural poor, in particular women, to pool (combine) their savings.
• A self-help group consists of 15 to 20 people who save money and regularly deposit it with the group.
• Savings vary from member to member, ranging from Rs 25 to Rs 100, depending on the individual's ability to save.
• The organisation's goal is to lend money to the members in need at a lower rate of interest than what moneylenders or banks charge.

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What are self-help groups of the poor?

Self-help groups and loans

• Group members make decisions on the savings and loan activities of the group.
• Members unanimously decide on the details of the loans to be provided, such as the purpose, amount, interest rate and repayment schedule.
• If the organisation saves regularly for a year or two, it can become eligible for a bank loan after a year or two.
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• The loan is granted in the name of the organisation and is intended to provide members with self-employment opportunities.
3. Money and Credit
• given to members to help them free mortgaged land or meet working capital needs.
• Any instance of a member failing to repay a loan is taken seriously by the other members of the group.
Self Help Group
• Because of this good record of repayment, banks are willing to lend to disadvantaged women who are organised in SHGs even if they have no collateral.
• SHGs help women to become financially self-reliant.
• The group's regular meetings also provide a forum for discussion and action on a number of social concerns such as health, nutrition and domestic abuse.

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What are self-help groups of the poor?

Grameen Bank of Bangladesh

• Grameen Bank of Bangladesh is one of the most notable success stories of reaching out to the poor and providing them with loans at reasonable rates.
• Grameen Bank began as a tiny operation in the 1970s and now has over 9 million members across 81,600 villages in Bangladesh.
• Almost all of the borrowers are women from the poorest strata of society.

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