Money & Credit

• Before the invention of money, double coincidence of wants was required for barter exchange
• Money acts as an intermediate in the exchange process
• Importance of money:

  • Money is authorized by the government (RBI)
  • Modern currency has no intrinsic value of its own
  • Rupee (₹) is widely accepted as a medium of exchange
• The Reserve Bank of India issues currency notes on behalf of the central government

  • No other individual or organization is allowed to issue currency
  • No individual in India can legally refuse a payment made in rupees
• Demand deposits:

  • People deposit extra cash with banks (Bank account)
  • Demand deposits offer the facility of cheques, which instruct the bank to pay a specific amount to the person named on the cheque
• Loan activities of banks:

  • Banks earn income from the difference between what is charged from borrowers and what is paid to depositors
  • Banks keep a cash reserve and use the major part of deposits to extend loans
• Two different credit situations:

  • Credit pushes the borrower into a situation from which recovery is painful
  • Credit plays a vital and positive role in certain situations
• Terms of credit:

  • Collateral is an asset used as a guarantee until the loan is repaid
  • Terms of credit include documentation, collateral, mode of repayment, and interest rate
• Formal sector credit in India:

  • Formal sector loans are provided by banks and cooperatives
  • Informal sector loans include moneylenders, traders, and relatives/friends
  • Cheap and affordable credit is crucial for the country's development
• Interest rate:

  • No organization supervises interest rates
  • Interest rates can be high and lenders may use unfair means to recover money
• Formal and informal credit:

  • Banks and cooperatives need to increase lending to reduce dependence on informal credit sources
  • Majority of poor households borrow from the informal sector, while rich households borrow from the formal sector
• Self-Help Group for the Poor:

  • SHGs pool savings and provide small loans to members
  • Decisions regarding savings and loan activities are taken by group members
  • SHGs are the building blocks of organization for the rural poor