Econ

• Medium of exchange


  A person holding money can exchange it for any commodity or service that he might want
• Both parties have to agree to sell and buy each other commodities. This is known as a Double coincidence of wants
• Barter system


  Goods are directly exchanged without the use of money, the double coincidence of wants is an essential feature
• Money


  Provides the crucial intermediate step and eliminates the need for double coincidence of wants
• Money


  Acts as an intermediate in the exchange process, it is called a medium of exchange
• Currency


  Modern forms of money include paper notes and coins, authorized by the government
• In India, the Reserve Bank of India issues currency notes on behalf of the central government
• No individual in India can legally refuse a payment made in rupees
• Deposits with bank


  Another form in which people hold money, banks accept deposits and pay interest
• Demand deposits


  Deposits in accounts that can be withdrawn on demand, have the essential characteristics of money
• Cheque


  A paper instructing the bank to pay a specific amount from the person's account to the person in whose name the cheque has been issued
• Demand deposits, along with currency, constitute money in the modern economy
• Banks keep only a small proportion of their deposits as cash, use the major portion to extend loans
• Terms of credit


  Interest rate, collateral, documentation requirement, and mode of repayment
• Formal sector credit in India


  • Loans from banks and cooperatives
• Informal sector credit in India

  • Loans from moneylenders, traders, employers, relatives and friends
• The Reserve Bank of India supervises the functioning of formal sources of loans
• There is no organization that supervises the credit activities of lenders in the informal sector
• Compared to the formal lenders, most of the informal lenders charge a much higher interest on loans
• Cheap and affordable credit is crucial for the country's development
• 85% of the loans taken by poor households in the urban areas are from informal sources
• Urban households take only 10% of their loans from informal sources, while 90% are from formal sources
• The formal sector still meets only about half of the total credit needs of the rural people
• It is necessary that banks and cooperatives increase their lending particularly in the rural areas so that the dependence on informal sources of credit reduces
• It is important that the formal credit is distributed more equally so that the poor can benefit from the cheaper loans
• Banks are not present everywhere in rural India, and getting a loan from a bank is much more difficult than taking a loan from informal sources for the poor
• The absence of collateral is one of the major reasons which prevent the poor from getting the bank loans
• Informal lenders such as moneylender, on the other hand, know the borrowers personally and hence are often willing to give a loan without collateral
• However, the moneylenders charge very high rates of interest, keep no records of the transactions and harass the poor borrower
• In recent years, people had tried out some newer ways of providing loans to the poor