Money & Credit

MADATSST &

MUKUND INGLE

PRESENTS

MONEY & CREDITMr. Mukund B.

Ingle

CONTIAN OF THE CHAPTER Barter System & its challenges & how

money helps to solve How Bank mediates between Deposits &

Credit Credit System of the Bank Types of Loans & role of RBI SHGs – functions & importance

BARTER SYSTEM & ITS CHALLENGES

Definition – Exchanging goods with each other in olden time when people did not have money as a medium of exchange was called ‘Barter System’.

Problems faced by this system were – Double co-incidence of wants: it means both the parties should be ready

to exchange each other goods or trading would not take place. Fixing of values was the regular challenge in that system as there were

no specific system or methods to do that No Uniformity – there was no uniformity in all over the region or country

as the value fixed for the particular thing had its own local, social and cultural importance

No legal protection – this system had no legal protection or guarantee

MONEY – Medium of Exchange

In Barter system, Double Co-incidence of wants was the major issue as everyone had to find out the person who could be ready to exchange that good. Till the right person was not found, Barter System would not take place.

In recent economy, money provides the crucial intermediate step to solve the problem of ‘Double Co-incidence of Wants’ as It is no longer necessary for the shoe manufacturer to look for a farmer who will buy his shoes and at the same time sell him wheat.

Since money acts as an intermediate in the exchange process, it is called a medium of exchange.

CURRENCY

Today, every nation has its own currency that is in the form of paper or metal but not in the form of gold or silver.

That currency is used as the medium of exchange in that particular nation as it is decided to be the National Currency.

It is being legally protected, guaranteed and authorized by the government of that country. As only RBI in India has the right to print the currency on behalf of government.

It is being widely accepted as medium of exchange and no one can deny to have transaction through rupee in India.

DEPOSITS Deposits

The excessive amount at the beginning of the month is kept in bank by the people. That amount is called as ‘Deposits’.

Depositors The person who deposits is called as ‘Depositor’

Demand Deposits The deposits in the bank accounts can be withdrawn

on demand; these deposits are called demand deposits

CHEQUE 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.

Precautions to be taken while transacting trough Cheque – No rubbing & cutting Signature should match with the signature given in the bank Amount to be written in numbers and words Making cheque as account payee Be aware the amount available in the account

CHEQUE & Its AdvantagesSafe and secure mode of transaction

Each transaction is being recorded & help to prevent ‘Black Money’

It is a legal method of transaction

BANK AS A MEDIATOR Bank works as mediator between the people who have

excessive amount and the people who need that. People deposit their excessive amount in the bank. As

amount increases and becomes huge, banks take some of the amount of it and give loans to people who need that on the more interest rate than they give to depositors.

People repay the loan amount and so bank is able to give the depositors their amount back whenever they require.

LOAN ACTIVITIES OF THE BANK Banks hold some of the amount from their deposits as cash for day

to day withdrawal as depositors comes to ask for cash and some of the amount from those deposits can be used for loan activity.

Borrowers repay their loan back to bank and bank can give depositors their money back.

Banks give interest rate to depositors and charge the interest to borrowers. But the interest charged to borrowers is more than the interest given to depositors. This is the main income of the bank and bank is able to manage their daily expenses from that.

It means that taking loan is not that easy work. There are lots for things to be completed and banks don’t give the loan to everyone.

TERMS OF CREDIT The procedure to be completed while taking loan

Documentation Requirements: While applying for loan borrower has to fulfill many different types of documents such as address proof, id proof, income proof etc.

Interest Rate: Interest charged on loan varies according to loan type. That is charged annually.

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

Mode of repayment: How the loan can be returned to bank & in how many days.

Credit can have Positive EffectPositive Impacts

○ If borrower takes the loan for the manufacturing purpose to buy raw material, equipment and after production completed he/she repays the loan to bank. We can say that loan is working positive here as his capacity of production has increased and he is able to return the loan due the guarantee of output.

Credit can have Negative Effect Negative Impacts

○ If borrower takes the loan for agriculture purpose to buy quality seeds, fertilizer. He puts good source of irrigation but due to some reasons, production decreases so he is not able to give the loan back. Next year he takes loan, same thing happens and he still fails to repay. So he is debt-trap as h continues to repay the loan. In this case loan is working as negative factor due to no guarantee of output here.

TYPES OF CREDITFormal Source of Credit Informal Source of credit

1. Loan taken from Banks & Cooperatives

1. Loan taken from friends, relatives, money lenders & landlords

2. Charge low interest rate 2. Charge high interest rate

3. No use of unfair practices 3. More use of unfair practices

4. No exploitation of borrowers 4. More exploitation of borrowers

5. Controlled by RBI 5. No control of any legal institution

FUNCTIONS OF - RBI Regulate the entire banking system in India RBI is called the Creator, Operator and Destroyer of the

banking system in India Printing of Currency Finalizing the percentage of cash balance with the bank Check the documents of the each bank ON regular basis See that bank gives the loan to each and every one, not

only the profit-making business and traders

NEED OF CHEAP CREDIT It is said that cheap and affordable credit is crucial for the development of the

country. Examples are as follow: Unemployed Person: If unemployed person is provided with loan on less interest,

if could start his own business or job and earn some amount from that. In future he could not only increase his own income but help to generate more employment.

Farmer: The farmer who could do the agriculture only during rainy season is give loan to buy irrigation facilities. Now he is able to cultivate during winter as well as summer. With cheap credit he I has increased his production and helped to remove seasonal unemployment.

Businessman: If any businessman or industrialist is provided with loan, he can start his new venture. That will help to increase his income and by creating more new jobs he can help to grow national GDP also

RURAL CREDIT In rural area still, informal source of credit has the largest share. The

reasons are as follow: Availability: After 70 years of independent, still any our country many villages

don’t have cooperatives and banks. As formal source of credit is not available poor people have left with no choice but approaching to informal source of credit.

Documents: To get the loan from formal sources, person as to complete different types of papers and most the people in rural area are illiterate.

Time Consuming: The procedure of taking loan from formal sources is time consuming and farmers wait for monsoon and they need loan to purchase seeds. At informal sources they get loan faster.

Familiars: Money lenders are local people and well known people of that rural area. Even borrowers are known to them. But the banks are outsider.

SELF-HELP GROUPS 15 to 20 members especially women, from neighborhood come together and

save some of the amount from their weekly income and submit with the group.

As money is collected, they start giving loans to members charging them low interest rate and loan is given without collateral. Decision regarding loan lies with the members of the group.

After a year or two, if the group is regular in savings, it becomes eligible for availing loan from the bank. This provides them opportunity to start their own business and make themselves economically independent.

Moreover, SHGs are the building blocks of organization of the rural poor. Not only does it help women to become financially self-reliant, the regular meetings of the group provide a platform to discuss and act on a variety of social issues such as health, nutrition, domestic violence, etc.

Grameen Bank of Bangladesh Project started by Muhammad Yunus in 1970, for

reaching the poor to fulfil their credit requirements. He believed that if poor are given loan, they could improve their economic status.

By 2014, this bank has already reached to 8.63 million members and 81,390 villages in Bangladesh and customers are especially women. For this work, he was awarded with Noble Prize for Peace

Tips to study Economics Focus more on understanding than

mugging up. Don’t forget to read ‘Sources for

Information’. Keep solving the questions from ‘Let’s

Work These Out’.

THANK YOU

& BEST OF LUCK