 What is money?

 Barter System
 Old forms of money
 Modern forms of money
 Currency
 Currency: Medium of exchange
 Deposits with banks
 Demand deposits
 Cheque
 Loan activities of banks
 Credit
 Debt trap
 Collateral
 Terms of credit
 Different sectors of credit
arrangement
 Role of Reserve Bank of India
in the formal sectors
 sectors
Informal
Sources of in
 households credit for
India in rural
2003
 Why is it important that the
formal sectors should lend
more?
 Self Help Groups
 Why are the SHGs popular?
 Grameen banks of Bangladesh
⮚Money c an be defined as
anything that is generally
accepted as a means of exchange
and at the same time act as a
measure and store of value.
⮚Money acts as an intermediate in
the exchange process
⮚and therefore it is called a
medium of exchange.
⮚The main function of money in the
economic system is to facilitate the
exchange of goods and services.
⮚In a barter system, commodities are
exchanged with commodities without the
use of money.
⮚But both parties have to agree to sell and
buy each other’s commodities.
⮚This is called double coincidence of
wants.
⮚Money eliminates the need of double
coincidence of wants.
⮚Modern forms of money includes-
paper notes and coins.
⮚It is not made of precious metals as
gold, silver, copper coins.
1.The currency is authorised by the
government of India.
2.The Reserve Bank of India (RBI) issues
currency on behalf of the central
government.
3.As per Indian Law, no other individual or
organisation is allowed to issue currency.
4. A law legalises the use of rupee as a
medium of payment that cannot be
refused in settling the transactions in
India.
5. No individual in India can legally
refuse a payment made in rupees .
⮚People deposit money which they do
not need at a point of time by
opening a bank account in their
name.
⮚Banks accept the deposits and also pay
an amount of interest on the deposits.
⮚Since the deposits in the bank
accounts can be withdrawn on
demand, these deposits are called
demand deposits.
⮚ Cheque is paper instructing the bank to pay a
specific amount from the person’s account to the
person’s account in whose name the cheque has
been issued.
⮚ The facility of cheques against demand deposits
makes it possible to directly settle the payments
without the use of cash.
⮚Banks keep only a small proportion of their
deposits with themselves, as a provision to
pay the depositors who might come to
withdraw from the bank on any given days.
⮚Banks use a major portion of the deposits to
extend loan(credit).
⮚Banks mediate between those people who
have surplus funds(depositors) and those
people who are in the need of those
funds(borrowers).
⮚Banks charge a higher rate of interest on
the loan than what they offer on
deposits.
⮚The difference between what is charged
from borrowers and what is paid to the
depositors is their main source of
income.
⮚Credit (loan) refers to an agreement in
which the lender supplies the borrower
with money, goods or services in return
for the promise of future payment.
⮚In some situations credit plays an
important and a vital role but in some
situations it makes the situation of the
borrower worst than before (debt trap).
⮚At times repayment of the loan
becomes difficult and credit instead
of improving the earnings, pushes
the borrower into a situation from
which recovery is very difficult and
painful. This situation is called debt-
trap.
⮚ Collateral is an asset that the borrower own ( such
as land, building, vehicle, live stocks, deposits
with banks) and uses this as a guarantee to a lender
until the loan is repaid.
⮚ If the borrower fails to pay the loan, the lender has
the right to sell the asset or collateral to obtain
payments.
⮚ Property such as land titles, deposits with banks,
live stocks are some common examples of
collateral.
⮚Interest Rate
⮚Collateral
⮚Documentation
⮚Mode of Repayment
⮚The terms of credit vary substantially
from one credit arrangement to another.
 • Banks
FORMA • Cooperative
L s

• Money lenders
INFORMA • Traders
L • Relatives and
friends
⮚Reserve Bank of India supervises the
functioning of the formal .
⮚It monitors the banks in actually
maintaining cash balance.
⮚RBI sees that banks gives loans not
only to the profit making businesses
and traders but also to small
cultivators, small scale industries,
small borrowers etc.
⮚ Banks have to submit information to the RBI
periodically on how much they are lending, to
whom, at what interest rate etc.
⮚ The RBI
⮚There is no organisation which
supervises the credit activities of
lenders in the informal sector.
⮚They can lend at whatever rate they
choose.
⮚There is no one to stop them from using
unfair means to get their money back.
⮚Thus, the cost to the borrowing of
informal loans is much higher.
Moneylenders
Traders
Relatives and
Friends Others
Cooperative
Societies
Commercial
Banks landlords
⮚ The informal sector charges a very high interest
rate, which the poor people are not able to pay
back, and they get trapped in the debt trap.
⮚ Hence, the banks and cooperatives need to lend
more.
⮚ This would need to higher incomes and many
people could then borrow cheaply for a variety of
needs.
⮚ Cheap and affordable credit is crucial for the
country’s development.
Per cent of loans from
the FOMAL sector
(15%)

Per cent of loans from

the
INFOMAL sector( 85%)
Households with few assets

Per cent of loans from

the FORMAL sector
Per cent of loans from
the INFORMAL sector
W E L L - O F F
H O U S E H
O L D S
Per cent of loans
from the FORMAL
sector
Per cent of loans
from the
INFORMAL sector
R I C H HO U
S E H O L D S

Per cent of loans from

the FORMAL sector

Per cent of loans from

the
INFORMAL sector
The formal sector still meets only
about half of the total credit needs of
the rural people.
Most loans from the informal lenders
carry a very high interest rate and do
little to increase the income of the
borrowers.
⮚Thus the banks and the cooperatives
need to lend more particularly in the
rural areas, so that the dependence
on the informal sector reduces.
⮚While formal sector loans need to
expand, it also necessary that
everyone receives the loans.
⮚ Self- Help Groups consists of certain
members who pool their savings and
constitute a fund which is further used in
making finance and advances to other
members.
⮚A typical SGH has 15- 20 members.
⮚The members pool their savings and after
some time, it becomes a large amount
which is used to give loans to the needy
ones at a very normal rate of interest.
⮚ This helps to reduce the functioning of
informal sectors of credit.
⮚After a year or so, if such group is regular
in its savings, it becomes eligible for
availing loan from the bank.
⮚Loan is sanctioned in the name of the
group and is meant to create self-
employment opportunities for the
members .
⮚ Loans are provided for releasing mortgaged
land, for meeting working capital needs as
buying seeds, fertilisers, raw materials, for
acquiring assets like sewing machines,
handlooms, cattle etc.
⮚ Important decisions regarding the savings and
loan activities are taken by the group members.
⮚ The group decides the purpose, amount, interest
to be charged, repayment of the loan etc.
⮚Non- repayment of the loan is taken
seriously.
⮚Because of this feature the banks are
willing to lend loan especially to the
poor women when organised in SHGs.
The Self Help Groups are becoming
popular for th following reasons:
They help the borrowers overcome
the problem of lack of collateral.
They can get timely loans for variety
of purposes and at a reasonable
interest rate.
They are the building blocks of the
organisation of the rural poor.
⮚ It helps women to become self reliant.
⮚ The regular meetings of the group provide a
platform to discuss and act on various social issues
such as health, nutrition, domestic violence, etc.
⮚The Grameen Banks were started in the
1970s as a small project by Professor
Muhammad Yunus (recipient of the 2006
Nobel Prize for Peace).
⮚Grameen Bank now has over 6 million
borrowers in about 40,000 villages spread
across Bangladesh.
⮚Almost all the borrowers are women and
belong to poorest sections of the society.
⮚These borrowers have proved that the poor
women can start and run a variety of small
income generating activities successfully.
⮚Professor Md. Yunus