Class 10 Economics chapter 3 notes money and credit cbse ncert

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Money and Credit

Money and credit play a crucial role in the functioning of modern economies. They form the foundation for transactions, savings, and investments. This guide simplifies the concepts of money, credit, and their impact on economic activities.

Money as a Medium of Exchange

Money serves as an intermediary in the process of exchange, eliminating the complexities of the barter system. Its universal acceptability makes it easy for individuals to trade goods and services efficiently. Whether it’s buying groceries or paying for services, money streamlines transactions.

Modern Forms of Money

The concept of money has evolved over time. Here's a look at its journey:

• Historical Usage: In earlier times, commodities like grains and cattle were used as money. Later, metallic coins made of gold, silver, and copper became prevalent.
• Currency Notes and Coins: Today, paper currency and coins are the most widely used forms of money. In India, the Reserve Bank of India (RBI) issues currency notes, ensuring trust and authenticity.
• Bank Deposits: Apart from cash, people also hold money as deposits in banks. These deposits are accessible on demand and can be withdrawn or used for payments through cheques.

Loan Activities of Banks

Banks play a pivotal role in economic development by providing loans. They hold a small percentage (around 15%) of their deposits as cash reserves to meet withdrawal demands. The remaining portion is used to provide loans, fueling various economic activities.

• Interest Rates: Banks charge higher interest rates on loans than they pay on deposits. This difference constitutes their primary source of income.
• Meeting Loan Demand: Loans are provided for purposes like business expansion, education, and personal needs.

Credit and Its Dual Nature

Credit, or loans, can have both positive and negative outcomes depending on circumstances.

• Positive Credit Example: Salim, a small entrepreneur, uses credit during the festive season to meet production costs. This helps him earn higher profits, improving his financial situation.
• Negative Credit Example: Swapna, a farmer, borrows money to grow crops. However, crop failure pushes her into a debt trap, forcing her to sell her land to repay the loan.

These examples highlight how credit can be a boon or a bane based on the risks and support systems in place.

Understanding the Terms of Credit

Every loan agreement includes specific terms, such as:

1. Interest Rate: The cost of borrowing money.
2. Collateral: An asset pledged as security against the loan (e.g., land, property, or savings).
3.  Documentation: Necessary paperwork to formalize the loan.
4. Repayment Mode: The schedule and method of returning the borrowed amount.

These terms vary based on the lender and borrower.

Formal and Informal Credit Sources

Credit in India is categorized into two sectors:

•  Formal Sector Loans: These are loans provided by banks and cooperatives under RBI supervision. They are generally more affordable and secure.
•  Informal Sector Loans: These loans are offered by moneylenders, traders, and relatives. They often come with high-interest rates and lack regulatory oversight.

Expanding Formal Credit Access

Although formal sector loans are beneficial, they currently meet only about half of the rural population’s credit needs. Expanding formal credit access can help reduce reliance on informal sources and make borrowing affordable for the poor.

Self-Help Groups (SHGs): A Solution for the Poor

SHGs are small community-based groups designed to provide financial independence to their members. These groups, usually comprising 15-20 individuals, pool their savings to create a common fund. This fund is then used to provide loans to members at reasonable interest rates.

Benefits of SHGs

• Overcome the need for collateral.
• Timely and affordable credit access.
• Encourage savings and financial independence.
• Act as platforms for discussing social issues like health and domestic violence.
• Promote women empowerment by making them financially self-reliant.

Sustainability of Development

Sustainable development is about meeting present needs without compromising the future. Overexploitation of natural resources, such as groundwater and forests, poses significant challenges. A balanced approach is essential to ensure long-term growth and sustainability.

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