Money is something that is accepted by the people as a medium of exchange in the market, and it has transformed the way in which the people buy and sell the goods and the services. Before the use of the money, the people used the barter system, in which the goods were exchanged for the goods. The chapter examines the history of the money, the forms of the money in the modern economy, the functions of the banks, the credit and its importance, the terms of the credit, and the problems of the credit in the Indian economy.
The chapter begins with the story of the barter system and the difficulties of the double coincidence of wants, and it shows how the money solved these difficulties. The money in the modern economy takes the forms of the currency, the deposits with the banks and the cheques. The banks, which accept the deposits and give the loans, play a central role in the economy, and they are the creators of the credit.
For the board examination, students must understand the concept of the barter system and its limitations, the forms and the functions of the money, the working of the banks and the concept of the credit creation, the terms of the credit and the importance of the collateral, the problems of the formal and the informal sectors of the credit, and the self-help groups as a solution for the poor.
In the ancient times, the goods were exchanged for the goods, and this system of the exchange was known as the barter system. In the barter system, the goods and the services were directly exchanged for the other goods and the services, and there was no common medium of the exchange. For example, a person who had the rice and wanted the cloth would have to find a person who had the cloth and wanted the rice, and this required the double coincidence of the wants.
The double coincidence of the wants is the situation in which the wants of the two persons coincide, and each person wants what the other person has. The barter system was difficult to work with because the double coincidence of the wants was difficult to achieve, and it was also difficult to store the goods and to measure the value of the goods. The barter system, therefore, could not work efficiently in the large and the complex economies.
The difficulties of the barter system led to the invention of the money, which solved the problem of the double coincidence of the wants. The money is the common medium of the exchange, and it is accepted by everyone in the market. The money made the exchange of the goods and the services much easier, as the people could now sell their goods for the money and buy the other goods with the money.
The money in the modern economy takes various forms, and the most common form is the currency, which includes the paper notes and the coins. The currency is issued by the government and the Reserve Bank of India, and it is the legal tender, which means that it is accepted by the people in the exchange of the goods and the services, and it cannot be refused by anyone. The modern currency is not backed by the gold; it is a fiat money, which is accepted because the government declares it as the legal tender.
The other important form of the money is the bank deposits. The people deposit their money in the banks, and the deposits with the banks can be withdrawn at any time, and they can be used for the payment through the cheques and the other instruments. The cheques are the instruction to the bank to pay a certain amount of the money from the account of the person to the person who is named in the cheque. The demand deposits, which can be withdrawn by the cheques, are also the money.
The money thus serves the three main functions: it is the medium of the exchange, it is the unit of the account, and it is the store of the value. The money is the medium of the exchange, as it is used to buy and sell the goods. It is the unit of the account, as the value of the goods and the services is measured in terms of the money. And it is the store of the value, as it can be saved and used in the future.
The banks are the financial institutions that accept the deposits from the people and give the loans to the borrowers. The banks accept the deposits, and the people who deposit their money in the banks are called the depositors, and they earn the interest on their deposits. The banks use the deposits to give the loans to the borrowers, and the borrowers pay the interest on the loans. The banks charge a higher rate of the interest on the loans than the rate they pay on the deposits, and this difference is the profit of the banks.
The banks create the credit, as they give the loans to the borrowers, and the loans create the deposits, which can be used as the money. The banks keep only a small proportion of the deposits as the cash reserve, and the rest of the deposits are given as the loans. The credit creation by the banks increases the money supply in the economy, and it is important for the investment and the production.
The credit or the loan is important for the economic activity, as it helps the people to buy the houses, the farms and the businesses, and it helps the farmers to buy the seeds, the fertilizers and the machinery. The credit is the crucial element in the economic life of the people, and the terms of the credit are the interest rate, the collateral and the documentation requirement.
The terms of the credit are the conditions on which the loan is given, and they include the interest rate, the collateral and the documentation requirement, and the mode of the repayment. The interest rate is the rate at which the interest is charged on the loan, and it varies from the lender to the lender and from the loan to the loan. The collateral is the asset, such as the land, the building or the gold, which the borrower offers as the security for the loan, and the lender can sell the collateral to recover the loan if the borrower fails to repay.
The documentation requirement is the papers that the borrower has to provide, such as the proof of the income and the identity, and the mode of the repayment is the way in which the loan has to be repaid, such as the monthly instalments or the lump sum. The terms of the credit vary between the different lenders, and the terms of the credit from the banks and the other formal institutions are often different from the terms of the credit from the informal lenders.
The terms of the credit are important because they determine the cost and the availability of the credit to the borrowers. The borrowers who can provide the collateral and the documentation can get the credit at the lower interest rates from the formal institutions, while the borrowers who cannot provide the collateral are often forced to borrow from the informal lenders at the very high interest rates.
The credit in India is available from the formal sector and the informal sector. The formal sector of the credit includes the banks and the cooperative societies, and the Reserve Bank of India supervises the functioning of the formal sector. The formal sector provides the credit at the lower interest rates, and the terms of the credit are regulated by the government and the RBI. The formal sector also provides the credit to the large industries, the big farmers and the businessmen.
The informal sector of the credit includes the moneylenders, the traders, the employers, the relatives and the friends, and the Reserve Bank of India does not supervise the functioning of the informal sector. The informal sector provides the credit at the very high interest rates, and the terms of the credit are not regulated. The poor people, who cannot provide the collateral and the documentation, are forced to borrow from the informal sector, and they are often exploited by the moneylenders.
The formal sector of the credit provides only about half of the total credit in India, and the rest is provided by the informal sector. The chapter stresses the need for the expansion of the formal sector of the credit, so that the poor people can get the credit at the reasonable interest rates and without the exploitation. The formal sector of the credit has to be made more accessible to the poor, and the transactions in the formal sector have to be made easier.
The Self-Help Groups (SHGs) are the groups of the poor people, especially the women, who save a small amount of the money every month and pool their savings. The Self-Help Groups are formed by the poor people, and they are the groups of about fifteen to twenty members, who meet regularly and save their money. The savings of the members are deposited in the bank, and the group can take the loan from the bank in the name of the group.
The Self-Help Groups provide the credit to the poor, as the group gives the loans to its members for the various purposes, such as the seeds and the fertilizers, the buying of the animals and the small businesses. The Self-Help Groups have been very successful in providing the credit to the poor, and they have also helped in the empowerment of the women, as the women who are the members of the groups have gained the confidence, the savings and the decision-making power.
The Self-Help Groups solve the problem of the collateral, as the group acts as the guarantor for the loans of the members, and the banks can give the loans to the groups without the collateral. The Self-Help Groups have also helped in the reduction of the exploitation by the moneylenders, as the poor people can now get the credit from the groups at the reasonable interest rates. The chapter concludes that the expansion of the credit to the poor, through the formal sector and the Self-Help Groups, is essential for the development and the empowerment of the people.
| Term | Meaning |
|---|---|
| Barter system | Exchange of goods for goods without money |
| Double coincidence of wants | Both parties want what the other has |
| Currency | Paper notes and coins, legal tender |
| Demand deposits | Deposits that can be withdrawn by cheques |
| Collateral | Asset offered as security for a loan |
| Credit | Loan given by a lender to a borrower |
| Source of Credit | Features |
|---|---|
| Formal sector | Banks and cooperatives, supervised by RBI, lower interest rates |
| Informal sector | Moneylenders, traders, employers, very high interest rates, not regulated |
| Self-Help Groups | Groups of 15-20 poor people (especially women), savings and loans, act as guarantor |
Money is a fundamental institution of the modern economy, which solved the difficulties of the barter system and the double coincidence of wants, and it exists in the forms of currency, bank deposits and cheques. Banks play a central role in the economy by accepting deposits and creating credit through their loans, and the terms of credit, including the interest rate and the collateral, determine the cost and the availability of credit. The Indian economy, however, has a dual structure of credit: the formal sector, supervised by the RBI, provides cheaper credit but reaches only about half of the borrowers, while the informal sector, with its moneylenders and high interest rates, exploits the poor who lack collateral. The Self-Help Groups have emerged as a powerful solution, providing credit without collateral and empowering poor women. The chapter concludes that the expansion of fair and accessible credit, through the formal sector and the Self-Help Groups, is essential for the development and the empowerment of the people.