CBSE Class 10 Social Science Money And Credit Notes

Money: Anything chosen by common consent as a medium of exchange.

Demand Deposits: Deposits in the bank account that can be withdrawn on demand.

Cheque: Paper instructing the bank to pay a specific amount from a person’s account to the person in whose name the cheque is drawn.

Reserve Bank of India: It is the central bank of India which controls the monitory policy of the country. It also control and supervises all the commercial banks in India.

Credit: The activity of borrowing and lending money between two parties.

• Collateral: Collateral is an asset that the borrower owns (such as land, building, vehicle, livestock, deposits with banks) and uses this as a guarantee to a lender until the loan is
repaid. Property such as land titles, deposits with banks, livestock are some common examples of collateral used for borrowing.

Terms of Credit: Interest rate, collateral and documentation requirement, and the mode of repayment together comprise what is called the terms of credit. The terms of credit vary substantially from one credit arrangement to another. They may vary depending on the nature of the lender and the borrower.

Formal credit: Loans provided by institutions under the direct supervision of RBI. Main sources are Banks, Cooperative Societies and Financial Institutions

• Informal credit: Loans provided by individual under no supervision, like money lenders, Friends & Relatives, Traders etc.

• Self Help Groups (SHG): These are groups generally formed in villages where money is collected from the members and given as loan to the member at a nominal rate of interest.

Barter System : Goods are exchanged without use of money.

Double Coincidence of wants : In exchange of goods both parties have to agree to sell and buy each others commodities. In a barter system double coincidence of wants is an essential feature.

Medium of Exchange : Money act as an intermediate in the exchange process. Currency is authorised by the government as medium of exchange.

- People deposit extra cash with the banks by opening the bank account in their name.

- The deposits in the bank accounts can be withdrawn on demand, these deposits are called demand deposits.

- A check is a paper instructing the bank to pay a specific amount from the persons account to the person in whose name the cheque has been made.

Loan Activities of Banks :

- Banks in India these days bold about 15% of their deposits as cash.

- Kept as provision to pay the depositors who might come to withdraw money from the bank on any given day.

- Bank use the major portion of the deposits to extend loans.

- Difference between the interest rates is the main source of income for banks.

Terms of Credit :

- Interest rate

- Collateral

- documentation requirement.

- the mode of repayment. the varying terms of credit in different credit arrangements.

Formal Sector Credit in India

Loans from banks and co-operatives Functions of Reserve banks.

- Issues currency notes on behalf of the central government.

- RBI monitors the banks are actually maintaining cash balance.

- RBI collect information from banks, how much they are lending to whom, at what interest rate etc.

Informal Sector Loans

The informal lenders, traders, employers, relatives and friends etc.

- There is no organisation which supervise the credit activities of lenders.

- They can lend at what ever interest rate they choose.

- Their is no one to stop then from using unfair means to get their money back.

Facts that Matter

1. Money acts as an intermediate in the exchange process and therefore it is called a medium of exchange.

2. In our day to day transactions, goods are being bought and sold with the use of money. At times we do exchange services with money.

3. Use of money has made things easier to exchange as we can exchange it for any commodity we need.

4. The main function of money in an economic system is to facilitate the exchange of goods and services.

5. In a barter system, commodities are exchanged with commodities without the use of money. But both parties have to agree to sell and buy each other’s commodities. This is called double coincidence of wants. But the use of money eliminates the need for double coincidence of wants.

6. Money acts as a medium of exchange in transactions. In the earlier times, before the introduction of coins, a variety of objects was used as money. For example, grains and cattle, metallic coins—gold, silver, copper coins.

7. Modern forms of money include currency—paper notes and coins. It is not made of precious metals as gold, silver, copper. It is accepted as a medium of exchange because the currency is authorised by the government of India.

8. RBI issues notes on behalf of the central government. The law legalises the use of rupee as a medium of payment that cannot be refused in settling transactions in India.

9. People deposit money with the banks which they don’t need at a point of time by opening a bank account in their name. Banks accept the deposits and also pay an amount of interest on the deposits.

10. The deposited money in bank can also be withdrawn at the depositor’s wish. Since the deposits in the bank accounts can be withdrawn on demand, these deposits are called demand deposits.

11. It offers a facility i.e. the payments made by cheques. A cheque is 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. The facility of cheques against demand deposits makes it possible to directly settle payments without the use of cash.

12. Banks keep only a small proportion of their deposits as cash with themselves, as a provision to pay the depositors who might come to withdraw from the bank on any given days.

13. Banks use their major portion of the deposits to extend loans; there is huge demand of loans for various economic activities.

14. Banks mediate between those people who have surplus funds (depositors) and those who are in need of those funds (the borrowers).

15. Banks charge higher rate of interest on the loans than what they offer on deposits. The difference between what is charged from borrowers and what is paid to depositors is their main source of income.

16. The banks play an important role in the economy of a country by providing cheap loans to a large number of people.

17. Banks employ a large number of people and thus they solve the problem of unemployment to a great extent.

18. Banks are sometimes not willing to lend to certain borrowers because some persons are not able to produce certificate of their earning. There are some people who have a history of non-repayment of loans. There are other people who are not able to produce documents of their employment. Some persons have nothing to give to bank as collateral.

19. A large number of transactions in our day to day activities involve credit in some form or the other. Credit refers to an agreement in which lender supplies the borrowers with money, goods and services in return for the promise of future payments.

20. In the rural areas the main demand for the credit is for the crop production.

21. Farmers usually take crop loans at the beginning of the season and repay loan after harvest. Repayment of the loan is dependent on the income from farming.

22. If the harvest is poor, the repayment of the loan becomes difficult and credit instead of improving the earnings, pushes the borrower into a situation from which recovery is very difficult and painful. This situation is called debt-trap. Then the borrower is forced to give up his collateral or asset used as the guarantee to the lender.

23. Terms of credit such as interest rate, collateral, etc. vary substantially from one credit arrangement to another. They may vary depending on the nature of the lender and borrower. Every loan agreement specifies an interest rate which the borrower has to pay to the lender along with the repayment of the principal. In addition to this, lenders may demand collateral (security) against the loans.

24. People obtain loans from Formal and Informal sectors. Formal sectors include banks and cooperatives.

25. Reserve Bank of India (RBI) supervises the functioning of formal sources of loans.

26. Informal sectors include money lenders, traders, employers, relatives and friends etc. There is no one to supervise their credit activities. It can charge whatever interest rate they choose. There is no one to stop them from using unfair means to get their money back.

27. Compared to the formal lenders most of the informal lenders charge a much higher interest on loans.

28. Higher cost of borrowing means a larger part of earnings of the borrowers is used to repay the loan and they have less income left for themselves.

29. For these reasons banks and cooperatives need to lend more and expand formal sources of credit in India. This would lead to higher incomes and many people could then borrow cheaply for a variety of needs. Cheap and affordable credit is important for the country’s development.

30. At present it is the richer households who receive formal credit whereas the poor have to depend on the informal sources. It is important that the formal credit is distributed more equally so that the poor can benefit from the cheaper loans.

31. Self-help groups consist of certain members who pool their savings and constitute a fund which is further used in making finance and advances to other members. This helps to reduce the functioning of informal sectors of credit.

32. After a year, if such a group is regular in its savings, it becomes eligible for availing loan from the bank. Such loans create employment opportunities.

33. SHGs are becoming popular because they help borrowers overcome the problem of lack of collateral. They can get timely loans for variety of purposes and at a reasonable interest rate. They help women to become self-reliant.

Words that Matter

1. Medium of exchange: Money acts as an intermediate in the exchange process.

2. Double coincidence of wants: When in the exchange, both parties agree to sell and buy each other’s commodities it is known as double coincidence of wants.

3. Currency: Modern forms of money like paper notes and coins.

4. Demand deposits: The deposits in the bank accounts can be withdrawn on demand, these deposits are called demand deposits.

5. Cheque: It is 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.

6. Credit: The term refers to an agreement in which lender supplies the borrowers with money, goods and services in return for the promise of future payments.

7. Debt-trap: At times repayment of the loan becomes difficult and credit instead of improving the earnings, pushes the borrower into a situation from which recovery is very difficult and painful. This situation is called debt-trap.

8. Collateral: It is an asset that the borrower owns such as land, building, vehicle, livestocks and deposits with banks and uses this as a guarantee to a lender until the loan is repaid.

9. Depositor: Person who deposits money in the bank.

10. Borrowers: People who takes loans from the bank.

11. Lender: A person who gives money to a borrower.

12. Reserve Bank of India: The supreme institution of the financial system.

13. Formal sector loans: Loans from banks and cooperatives.

14. Informal sector loans: Loans taken from money lenders, traders, relatives and friends.

15. SHGs: Self-help groups consist of certain members who pool their savings and constitute a fund which is further used in making finance and advances to other members.

Important Terms and Concepts

1. Barter System : It is a system of transaction in which goods are mutually exchanged for the fulfillment of needs between two persons.

2. Double Coincidence of Wants : It is a situation of barter system in which both the parties agree to exchange mutually possessed goods for the fulfillment of their requirements.

3. Money : It is anything which is generally acceptable as a medium of exchange. The modern forms of money include currency, coins and demand deposits.

4. Bank : An institution which accepts deposits from the people who have surplus funds and extends credit to those borrowers who need the funds for the fulfillment of various requirements.

5. Demand Deposits : These are the bank deposits which can be withdrawn at the demand of the depositors through cheque.

6. Cheque : A cheque is a credit instrument through which the depositors instruct the bank to pay a specific amount from the depositor's account to the person in whose name the cheque has been issued.

7. Credit or Loan : Credit (loan) refers to an agreement between a lender and borrower in which the lender supplies the borrower money, goods or services with the promise of borrower for future payment. 

8. Borrower : A borrower is a person or an institution who wants the fund as loan.

9. Creditor : A creditor is a person or an institution who lends the funds to the borrowers.

10. Debt trap : It is a situation in which the payment of debt becomes more than the income of the borrower. So, he has to take more debts to expedite the previously secured debt.

11. Collateral : Collateral refers to an asset that the borrower owns and mortgages this asset as a guarantee to the lender until the loan is repaid.

12. Terms of Credit : Agreement regarding interest rate, collateral and documentation requirement and the mode of repayment etc. together constitute the Terms of Credits.

13. Informal Sources of Credit : The informal sources include moneylenders, traders, employers, relatives and friends, etc.

14. Formal Sources of Credit : The formal sources of credit include banks and cooperatives.

Full Forms

1. SHG : Self Help Group

2. RD : Recurring Deposit

3. NABARD : National Bank for Agriculture and Rural Development

4. DD : Demand Deposit

5. NSSO : National Sample Survey Organisation

6. RBI : Reserve Bank of India

QUESTION AND ANSWERS: 

1. Self Help Groups support has brought about a revolutionary change in the rural sector.
Which values according to you is it able to support. (Value based question)
• Women empowerment
• Team work
• Self sufficiency
• Eradication of poverty

2. What are the limitations of the barter system?
• Lack of double coincident
• Lack of divisibility
• Lack of measure of value.
• Problem of store of value.

3. What are the advantages of depositing money in the banks?
• It is the safer place to keep money as compared to the house or a working place.
• People can earn interest on the deposited money.
• People have the provisions to withdrawn the money as and when they require.
• People can also make payment through cheques.

4. What is collateral?
• Collateral is an asset that the borrower owns (such as land, building, vehicles, livestock, deposits with banks) and uses this as a guarantee to a lender until the loan is repaid.
• If the borrower fails to repay the loan, the lender has the right to sell the asset or the collateral to obtain the payment.
• C) Property such as land, livestock etc are some of the common examples of collateral used for borrowing.

5. What are the functions of money?
• Money has solved the problem of barter system.
• Acts as medium of exchange
• Serves as a store of value.
• Serves as a measure of value.

QUESTION AND ANSWERS: (FIVE MARK)

1. In what ways does the Reserve Bank of India supervise the functioning of banks? Why is this necessary?
• It ensures that the banks actually keep a certain % of their deposits as cash balance/cash reserve with the Central bank.
• It observes that banks give loans to small activators, small scale industries, small borrowers also and not become a profit making business.
• Report has to be submitted periodically by the banks to RBI containing details such as how much they have lent, to whom and at what rate of interest etc.
• Central Banks is the lender of the last resort. Whenever banks are short of funds, they can take loans from the Central Banks. Thus it is source of great strength to the banking system.
• It acts as a bank of central clearance settlements and transfers.

2. Explain the functions of commercial banks.
• Accepting deposits: Banks keep only a small proportion of their deposits as cash with themselves. This is kept as a provision to pay the depositors who might come to withdraw money from the bank.
• Providing loans: Banks use the major portion of the deposits to extend loans. Banks make use of the deposits to meet the loan requirements of the people.
• Transfer of funds: In this way, banks mediate between the depositor and borrowers.
• Credit creation: provides loan from people’s deposits. The borrower does not withdraw the whole loan amount instead deposits in the same bank. It enables the bank to provide further loan.
• Agency functions: In modern times bank also acts as an agent of the customer.

3. Distinguish between formal and informal credit sources.
Formal Sector
• These resources work under the supervision of the Reserve Bank of India (RBI).
• The rate of interest is very low.
• Commercial banks, cooperative societies etc. are the main sources of formal credit.
Informal Sector
• These do not work under any government organization.
• The rate of interest is very high.
• Relatives, money lenders and landlords are the main sources of informal credit.

4. ‘Most of the poor households are still dependent on informal sources of credit’. Explain.
• Banks are not present everywhere in rural India, where as the informal sources are easily available in all the villages.
• Getting a loan from the bank is much more difficult than taking a loan from the informal resources because bank loans require proper documents and collateral. Most of the poor
people don’t possess anything to offer as collateral.
• Moneylenders provide loan to the poor people without any collateral.
• The formal sources provide loan only for productive purposes, whereas the informal sources provide credit for productive and non-productive purposes.
• The method of business of the formal source is very complex, whereas the informal resources have a very simple way of business.

5. Cheap and affordable credit is crucial for the countries development. Highlight the role of loans in reference to India.
• High cost of borrowing leads to a major share of profits to be paid as interest.
• At time, higher rates leads to more interests than the principal.
• Debt trap discourages new entrants
• More loans given by banks and co-operatives
• Promotion of small scale industries.

6. What are demand deposits? What are their advantages? Why are demand deposits considered as money?
The deposits in the bank accounts which can be withdrawn on demand are known as demand deposits.
• People earn interest on the demand deposits.
• The depositor can make the payment through a cheque.
It Is considered as money because
• They can be used as a medium of exchange.
• They are easily acceptable.
• They help in settling payment without the use of cash.

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