Money and Credit (Brief notes for revision) Barter System: Goods are exchanged without use of money. Double Coincidence of wants: In exchange of goods both parties have to agree to sell and buy cach other’s commodities. In a barter system double coincidenceof wants is an essential feature. Medium of Exchange: Money act as an intermediate in the exchange process.Currency is authorized by the government as medium of exchange. Loan Activities of Banks: = People deposit extra cash with the banks by opening the bank account intheir name. = The deposits in the bank accounts can be withdrawn on demand, these deposits are called demand deposits. "A check is a paper instructing the bank to pay a specific amount from thepersons account to the person in whose name the cheque has been made. = Banks in India these days bold about 15% of their deposits as cash. ™ Kept as provision to pay the depositors who might come to withdrawmoney from the bank on any given day. = Bank use the major portion of the deposits to extend loans. Terms of Credit: Interest rate Collateral documentation requirement, the mode of repayment. Formal Sector Credit in India Loans from banks and co-operatives Functions of Reserve bank: = Issues currency notes on behalf of the central government. - RBI monitors the banks are actually maintaining cash balance. - RBI collect information from banks, how much they are lending to whom,at what interest rate etc.Informal Sector Loans The informal lenders, traders, employers, relatives and friends etc © There is no organization which supervises the credit activities of lenders © They can lend at very high interest rate © There is no one to stop then from using unfair means to get their moneyback, Self- Help Groups «It is a new idea to organize rural poor, particularly women. © The group has 15 to 20 members from the same neighbourhood and they pool their i savings regularly. i | Their savings vary from 25 to 100 Rs. Or more, depending on their economic condition. | «When the group is consistent for more than two years, banks provide loan in the name of the group and then the SHG gives loan to its members. * They get loan from the bank even though they have no collateral, © The loan matter is taken seriously and is ensured that it is paid back in time. « SHGs make women financially self- reliant and provides platform to discuss various social issues. Grameen Bank of Bangladesh © This was initiated by professor Md. Yunus. * It is one of the biggest success stories in Bangladesh in reaching the poor to meet their credit needs. © Almost all the borrowers are women and they proved to be reliable borrowers. © This helped them to start small income generating activities successfully.