Money and credit

Money And Credit
Class – X,
Economics
Chapter- Money and Credit
8/3/2019 1Pankaj Saikia-2015

You've probably never thought very
much about money. It is just there.
When you want or need something, you
simply collect some money and pay for
it. That wasn't always the way things
were done,
Would you not like to to know about how
money has come.
8/3/2019 Pankaj Saikia-2015 2

Why should we study about
money
• All of us wants a good income in our future
which is measured in terms of money.
• Money is the means through which we measure
how much we earn, we spent, we lend, we
borrow, we save, we donate………………
• To earn economic wealth managing money is no
way less important than earning.
• Studying about money and credit enable us to
make wise economic decision like allocation,
investment, savings, expanditure, etc.

Major learning Objectives
1. DIFFERENT PHASES OF EVALUATION OF MONEY.
2. DEFINITION, FEATURES, FUNCTIONS AND
SIGNIFICANCE OF MONEY.
3. VARIOUS MODERN FORM OF MONEY.
4. BANK AND ITS BASIC FUNCTIONS.
5. CREDIT, TERMS OF CREDIT AND THEIR ROLE.
6. SOURCES OF CREDIT, CRITICAL ANALYSIS.
7. ROLE OF CO-OPERATIVE AND SHGS IN CAPITAL
FORMATION.

HOW DID MONEY EVOLVED.
• In the premitive age need of people
were very limited and people by
themselves collected everything like
food to eat and skin of animals and
plants to wear, etc.
• There was no need of exchange and
money.

Emergence of exchange
• With the growth of civilisation needs of people started
increasing.
• People who were expert in producing some goods started
taking it as a profession.
• THEY STARTED COLLECTING OTHER GOODS
THAT THEY NEED FROM OTHER PRODUCER IN
EXCHANGE OF THE GOODS PRODUCED BY THEM.
• EXAMPLE – A PERSON MAKING STONE TOOLS GIVES THE
TOOLS TO THE HUNTER AND GETS MEAT AGAINST THE
TOOLS.
• WICH LEAD TO DEVELOPMENT OF BARTER

Barter System
The system of direct exchange in
which comodities are exchanged for
some other comodity without using
any medium of exchange.
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Pankaj Saikia-2015
7

Main Features of Barter.
1. IT IS THE OLDEST EXCHANGE SYSTEM.
2. GOODS OR SERVICES ARE EXCHANGED / SWAP
FOR OTHER GOODS OR SERVICES DIRECTLY.
3. THERE WAS NO COMMON MEASURE OV VALUE.
4. NO MONEY OR OTHER MEDIUM OF EXCHANGE
WAS USED.
5. DOUBLE CO-INCIDENCE OF WANTS IS AN ESSENCE
OF BARTER SYSTEM.

Advantages of Barter.
• It is the direct exchange system and
therefore needs could be satisfied
immediately.
• No medium of exchange is required.
• Low transaction time is required which
helps the people to avoid the risk of
change in value over time.

Limitations of Barter.
• Need of double co incidence of
wants.
• Lack of standard measure of Value.
• Problem of divisibility.
• Problem in storing value.
• Problem of transferring value.
• Deferred payment was not possible.

Need of double coincidence of wants
Problem of Ramvilash
• He is a potter makes pots, and
wanted to exchange his pots for
some clothes, he visited all nearby
cloth makers, but none of them
ready to give the clothes in
exchange of his pots. They want
something different against their
clothes…
• To practise barter there must
be double coincidence of
wants.

Commodity Money
• The most primitive type of money is
commodity money.
Some useful commodity that is in
general demand is used as an exchange
medium and may serve both as a means
of payment and a measure of value.
8/3/2019 Pankaj Saikia-2015

Examples of Commodity Money
• Various commodities have
historically served as
money
– Cattle, tobacco, sugar, grains,
nails, shells, hides, metals,
etc.
• But the transaction is still
essentially a barter trade of
one good or service for
another good.

Limitations with comodity money.
• Need of double co incidence of wants.
• Deferred payment is not possible.

Cattle Money
• To overcome the problem of transfere of
value with commodity money people
started using cattles as money.
Domestic animals having common
utility were used as medium of
exchange. These animals were known as
cattle money.
8/3/2019 Pankaj Saikia-2015

Cattle money..

Limitations with cattle money.
• Need of double co incidence of wants.
• Deferred payment is not possible.
• Problem of divisibility.

Metallic Money.
• Some precious metals like gold, silver, etc.,
having common utility were started using as
medium of exchange. Which were known as
Metallic money.
• These were easy to store and not get damaged.
• Conveniently carry from one place to another
• Dividable in smaller parts.

Way to modern coins----
Started adding symbols to express value.
It gives a standrd measure of value.

Standardized with weight, size and colour.

Old precious metal were replaced with less
costly metals-

MONEY
• Anything which is used as a medium of
exchange, store of value, measure of value
and standard of differed payments.

Money can be anything
• Has purchasing power.
• Used as medium of exchange.
• Used to measure value of any goods or
services.
• Used to transfere value from one person to
another or one place to another.
• Used to store value for future use.
• Used as a standard of deferred payment.

FUNCTIONS OF MONEY
• 1. Medium of Exchange.

FUNCTIONS OF MONEY
2. Store of Value.

FUNCTIONS OF MONEY
3. Measure of Value.

FUNCTIONS OF MONEY
4. Transfere of Value.

FUNCTIONS OF MONEY
5. Standard of deferred payment.

Money in India
• The coins and paper currency of paise and rupee
are generally accepted as medium of exchange or
money in India.
• Paper currency note and mattellic coins for
denomination of Rs.2 and above are issued by
Reserve Bank of India in permission of Finance
Ministry of the central government. At present it
Issues coins and notes of Rs. 2, 5, 10, 20, 50, 100,
200, 500 and 2000.
• Rs 1 and its subsidiaries are issued by the Ministry
of Finance. It issues coins of Rs 1 and 50 Paise.

Other names of Modern currency.
• Symbolic or Token Money:-
• As the currency notes and coins
have no or very less intrinsic value
but represents a higher value,
therefore they are called Token
money.

• High Powered Money;-
• Currency notes and coins are called
high powered money because they
represent higher value (high power)
than their actual value.

•Legal tender money:-
•The Rupee notes and coins in India
are called legal tender money
because they poses a legal value and
no one can legally refuse any
payment made through these.

BANK
• Bank is a financial institution who
deals with money and credit as its
regular course of business.
• It accepts deposits from the depositors
and grant loans to the needy
borrowers.

FUNCTIONS OF BANK
• Accepting deposit.
• Granting Loans.
• Providing safety to valuables of customers.
• Transfering funds from one place to another
for customer.
• Accepting payment for customer.
• Making payment on behalf of customer.
Paying electricity bill/ Insurance primium
etc.)

MAIN FUNCTION Of BANK
Depositors
BANK
Borrowers

Major types of Deposits
Demand Deposit
• Withdrawable at
any time on
demand.
• It Includes deposit in-
a. Current Account, and
b. Savings Account.
Time or Term Deposit
• Withdrawable after
a certain period of
time.
• It Includes deposit in-
a. Fixed deposit Account,
and
b. Recurring deposit
Account.

Four Major Types of Deposit Accounts
• Current Deposit Account
• No restriction in deposit.
• No restriction in withdrowal.
• No interest is paid by the bank on deposit.
• Main purpose of opening such account is to
provide safety to customers cash.
• Rich businessman and organisation opens
such accounts.

• Savings Deposit Account
• No restriction in deposit.
• Withdrowal is possible at any time subject to some
restrictions.
• Low rate (3-4%) of interest is paid by the bank on
deposit.
• Main purpose of opening such account is savings
and meeting uncertain urgencies.
• Small businessman and people with low or
moderate income opens such accounts.

• Recurring Deposit Account
• Fixed amount is deposited at a fixed interval
for a fixed period.
• Withdrowal is only on maturity.
• Good rate of interest is paid by the bank on
deposit.
• Main purpose of opening such account is
capital formation and savings.
• People with regular income usually opens
such accounts.

• Fixed Deposit Account
• Fixed amount is deposited for a fixed period.
• Withdrowal is only on maturity.
• Highest rate of interest.
• Main purpose of opening such account is to
earn interest and save for certain future
needs.
• People having no other investment options
and with some certain future needs deposits
here.

DEMAND DEPOSIT IS A MODERN
FORM OF MONEY
• Money in demand deposit can be withdrawn
at any time through Cheque, ATM, etc.
• It can be used to make payment or purchase
at any time through Cheque, Debit card, Net
Banking, etc..
• It has purchasing power-----
• Anything having purchasing power is
money—
• Therefore demand deposit is money.

Modern form of money
• Money is anything that has Purchasing
Power
• Demand Deposit has Purchasing Power. (As
it can be used to make payment or to
purchase) therefore, Demand Deposit is
Money.
• -----------------------------------
• Money = Purchasing Power .
• Demand Deposit = Purchasing Power = Money .

CHEQUE
• It is a written document with which a depositor
orders his banker to pay a certain amount to
himself or to the bearer or to a certain person.

FEATURES OF CHEQUE
• Cheque is a written document in
prescribed form provided by bank.
• It is written by a depositor to his
banker.
• It caries an order to pay a certain sum
of money from the deposit.
• It is a modern form of money as it can
be used to make payment.

Essential components of a cheque
• Signature of depositor.
• Name of payee (Self/ Bearer/any third party)
• Amount must be specific and written in
both words and numbers.
• Date of drawing or making.
• Account number of the depositor.

Different Modern Form of money
• Card Money / Plastic Money- Debit
card, Credit card, Smart Card, Health
card, etc.
• Digital Cash- Net Banking, Mobile
Banking, etc.
• Bank money- Cheque, Demand
Draft, Bankers cheque, etc.
• Credit.

Credit
• Credit is an arrangement in which
ones financial need is satisfied with
the money or resource of another
with a promise to repay in future.

Credit
– A promese to pay in future
• Cash/goods/sarvices
B

Role of Credit in Development
• Credit makes proper use of excess money of
the depositors by channelising it to a
profitable investment. In this way it maximise
the use of countries worth.
• Enables the borrower to invest more than
their resources available with them.
• Maximizes the use of resources by providing
working capital.
• Helps the lenders to earn interest from their
savings.

Terms of Credit
• Different conditions in which the
borrower and the lender agreed
before granting or taking a loan.
•It includes-
• Rate of Interest.
• Mode of repayment.
• Collateral.
• Documentation required etc.

Sources of Credit
• The individual or organisation who
grants loan.
• Banks.
• NBFIs.
• Cooparatives.
• Family members.
• Friends.
• Traders.
• Money Lenders.

Sources of Credit
Formal Sources
• Controlled by RBI.
• Reasonable and justified rate
of interest.
• Granted for productive
purpose only.
• More documentation required.
• Legal proceedings followed to
recover loan amount if the
borrower fail to repay.
Informal sources
• Not controlled by anyone.
• Mostly high and unjust rate of
interest.
• Granted for any purpose.
• No or less documentation
required.
• Lender can take any measure
to recover loan if the borrower
fail to repay.

Formal Sources of credit
• Advantages--
• Low rate of Interest.
• Adopt judicious policy to recovery of loan.
• Grants loans only for productive purpose and
chances of falling in debt trap is less.
• Helps the borrowers for effective utilisation of loan
amount and promote development.
• Interest rate is fixed considering the prevailing
market and economic condition and therefore the
risk of borrowers are less.

Formal sources of credit
• Limitations--
• Grants only secured loan. So, the people without
proper colletoral can not borrow.
• Long process and high documentation.
• Less autonomy in utilisation of fund.
• Difficult to get loan to meet small financial needs.
• It grants loans only for Projects that are productive
in their eyes.
• Located at far from the borrowers particularly in
rural areas.

Informal sources of credit
• Advantages--
• Very easy process and Instant Credit.
• Less or No Documentation.
• Full or high level of autonomy in utilisation of
fund.
• Free to fix the loan amount and time and mode of
repayment.
• Loans are granted to meet all kind of financial
needs.

Informal sources of credit
• Limitations--
• High rate of interest.
• Though conditions for repayment.
• Undue and unnecessary interferance in utilisation
of fund.
• Unjust and unethical means of recovery of loan if
the borrower fails to repay.
• Mostly grants loans for unproductive purposes,
which is detrimental to the interest of the borrower
as well as the economy.

Do Credit is always beneficial?
Credit somtimes may be a burden for the borrower and
may lead to debt trap. Credit can be a burden mostly in
the following circumstances.
• If borrowed at a very high rate of interest.
• If borrowed money used for unproductive purpose.
• If invested in a business with high risk of failure.
• Delay in repayment of loan increases the burden as the
amount grow in cumulative interest.
• Failure to repay the loan may cause charge on the
property of the borrower which has been kept as
security against the loan.
• Taking fresh loan to repay the previous loan and fall in
debt trap, recovery from which becomes very difficult.

Status of Lending and borrowing in India
• In India both formal and informal sources
of credit is working simulteniously.
• Major part of the formal sector lending
goes to the large industrial sector.
• Small borrowers ie. small farmers, labour
class and small articians and businessmen,
etc. mostly borrows from informal sector.

Problems of borrowing from Informal
Sector
• High rate of interest.
• Though conditions for repayment.
• Undue and unnecessary interferance in
utilisation of fund.
• Unjust and unethical means of recovery of
loan if the borrower fails to repay.
• Failure to repay loan amount may lead to
loss of property and further detoriation of
economic condition.8/3/2019 59Pankaj Saikia-2015

Why Small farmers Borrow from
Informal Sector
• Hesitation to go to the bank.
• lliteracy
• Lack of awareness.
• Lack of Colletoral.
• Borrowing for Unproductive Purposes.
• Unability to fulfil Documentation needed.
• Poor Accessability to Banks.
• Easy Accessability to Money Lenders.

Is it important to protect the
borrower of Informal Sector
• Majority of the borrowers of the informal sector are
poor who need financial protection.
• To protect the borrowers from the exploitation of the
speculative moneylenders.
• Informal sector lending and the interest earned on it is
not taxed and therefore these are black money.
• This often leads to conflect between borrower and the
lender which sometimes creats critical law and order
situation.
• Unproductive loans can be used to finance illigal
business..

Measures to protect the borrowers of
Informal sector.
• Increasing the accessibility of formal sector
lending by expanding banking network.
• Easy and liberal documentation.
• Flexible ( size and duration) loan
arrangement.
• Reserved and compulsory lending for rural
and small scale industry .
• Awareness cappaigning.

Co-operative Society.
• Organisation of people joins for mutual
help.
• Development of the members is the main
purpose not earning profit.
• Registered under Cooperative Societies
Act.
• Minimum 10 members are required to
form a co operative.

Types of Cooperative
• Farmers Cooperative Society.
• Producers Cooperative Society.
• Weavers Cooperative Society.
• Customers Cooperative Society.
• Cooperative Credit Society.

Role of Cooperative Society in
Capital formation..
• Cooperatives accumulates its capital with the
contribution of members. Sometimes they
takes loans from the Banks and NBFIs in the
name of cooperative and use the fund either
in collective investment or grants loans to the
needy members of the society. They charges a
low rate of interest as their motive is not to
earn profit but the development of economic
condition of its members.

Self Help Group ( SHG)
• It is a small group of 10-20 people belonging from
the same locality.
• The main purpose of such group is to help its
members for their economic welbeing.
• They either carry on some collective business or
creats a fund to lend to the needy members.
• Government encourages such groups by arranging
bank loan at subdised rate of interest.

Origin of Self Help Group ( SHG)
Concept of SHGs developed in Bangladesh.
Gramin Bank of Bangladesh is the biggest
success story in reaching the poor to meet their
credit needs at reasonable rates through the
idea of SHG. Most of the borrowers are women
and belong to poorest section of the society.
-------------------------------------------------------------
The idea is the Brain Child of (developed by)
renowned economist Prof. Mohammed Yunus
recipient of Nobel Prize for peace in 1996.

Thank You
Your criticism and suggestion for
betterment worth a lot.

Money and credit

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