Definition and Modern Forms of Money
* In early times, people simply exchanged one commodity for another depending on their requirement under the barter system.
* The exchange of things in the barter system required double coincidence of wants.
* Money eliminates the need for double coincidence of wants.
* Since money enables the exchange process, it is called a medium of exchange.
* Early forms of money were things of daily use.
Modern currency:
* Uses paper notes and coins made of relatively inexpensive metals.
* Has no value of its own.
* Has a value because it is authorised by the government of a country.
* In India, the Reserve Bank of India issues currency notes and coins on behalf of the central government.
* The Rupee is India’s currency
* Nobody can refuse to accept a payment made in rupees in India.
* Bank – Types of Deposit
* People deposit their extra cash in banks.
* A bank not only keeps the money safe but also pays interest on deposit.
* A person needs to have an account with a bank to deposit money there.
* An account holder can withdraw money from his bank deposit on demand.
* Bank deposits are also called demand deposits.
* A cheque can be used to make payment directly from a bank deposit without using cash.
* A cheque is written instruction to a bank by an account holder to pay a specific sum to a specific person from his deposit.
Credit and Terms of Credit
* Banks hold about 15 percent of their deposits as cash to arrange for daily withdrawals by depositors.
* Banks use a major portion of deposits to give loans.
* The interest charged on loans is more than the interest paid by banks on deposits.
* The interest charged on loans is more than the interest paid by banks on deposits.
* Interest charged on loans – Interest paid on deposits = Income of the bank.
* The loan given by a bank is also referred to as credit.
A loan or credit is subject to certain terms, which can include:
* Rate of interest
* Collateral
* Documentation
* Duration of loan
* Mode of repayment
* Collateral is the security provided by a borrower against a loan, and it can be sold in case of non-payment.
* Credit can bring about a positive or a negative change in a person’s life.
Formal and Informal Credit
The different sources of credit include:
* Banks
* Traders
* Landlords
* Moneylenders
* Co-operative societies and
* Friends and relatives
* Banks and co-operative societies constitute the formal sector of credit.
* Landlords, moneylenders, traders, relatives, friends and other sources of credit constitute the informal sector of credit.
* At present, the formal sector provides only marginally more credit than the informal sector.
The credit activities of the formal sector are characterised by:
* Supervision by the Reserve Bank of India
* Low rates of interest
* Availability to all
The credit activities of the informal sector are characterised by:
* No supervising body
* High rates of interest and
* Only focus on profit
A high rate of interest on loan leads to:
* Low income left with the borrower
* Debt trap
At present, rich people have more access to cheaper credit from the formal sector, while poor people have to depend on the exploitative informal sector.
* Cheap credit is essential for development in a country.
* The formal sector must increase its lending to more and more people, especially in the rural areas.
SHEG (Self Help Groups)
* Poor households in India largely depend on the informal sector for credit.
* Banks demand collateral against a loan that poor people cannot provide.
* The members of a self-help group save regularly to create a savings pool.
* Members of the group can take small loans from their combined savings.
* The loans bear interest at low rates.
* After saving regularly for a few years, a self-help group becomes eligible for a bank loan without collateral.
* The loan is used to generate more income and employment opportunities.
* The members of a self-help group make all the decisions jointly and are jointly responsible for the repayment of loans.
* Banks also extend loans to poor women organised in self-help groups.
* Self-help groups allow poor people access to affordable, easy credit.
* The Grameen Bank of Bangladesh is a brilliant example of meeting credit needs of the poor at affordable rates.