Headings Of Textbook
- Money as the medium of exchange
- Modern forms of money
- Loan activities of banks
- Two different credits situations
- Terms of credits
- Formal sector credits in India
- Self-help group of the people
Money As The Medium Of Exchange
Barter System
- Double coincidence of want
- Deciding the value of goods is difficult
Money
- Money acts as an intermediate in the exchange process, it is called a medium of exchange.
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| Barter System |
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| Exchange With Money |
Modern Forms Of Money
- Modern types of money include currency — paper notes and coins
- The Federal Reserve Bank of India issues currency notes on behalf of the central government
- The law legalizes the utilization of rupee as a medium of payment that can't be refused in settling transactions in India
- No individual in our country can legally refuse a payment made in rupees
- The other form during which people hold money is as deposits with banks
Deposits With Banks
- The other form in which an individual can hold money, is as deposits with banks
- At a point of time, person need only some currency for their day-to-day needs
Loan Activities Of Banks
- Banks use the major portion of the deposits to increase loans
- There is an enormous demand for loans for various economic activities.
- Banks mediate between people who have surplus funds (the depositors) and people who are in need of those funds (the borrowers).
- Banks charge a higher rate of interest on loans than what they offer on deposits.
- The difference between what is charged from borrowers (person who borrows money) and what is paid to depositors (person who deposits money in banks) is their main source of income of the banks.
Two Different Credits Situations
- A large number of transactions in our day-to-day activities involve credit in some form or the opposite.
- Loan refers to an agreement during which the lender supplies the borrower with money, goods or services in return for the promise of future payment.
- Credit therefore plays a vital and positive role in some situation for example : a toy maker.
- Credit in this case pushes the borrower into a situation from which recovery is very painful for example : a small farmer.
Terms Of Credits
- Interest + principle.
- Collateral is an asset that the borrower owns (such as deposits with banks, vehicle, land, building) and uses this as a guarantee to a creditor until the loan is repaid.
- Interest rate + collateral + documentation requirement + mode of repayment = terms of credit.
Formal Sector Credits In India
- Formal sector loans – Banks
- Informal sector loans – family, relatives, friends, traders, moneylenders etc.
- RBI – Reserve Bank Of India
Formal Sector Loans
- Supervised by RBI
- Fix and low interest rate
- Need paper work
- Eg : Banks
Informal Sector Loans
- No organization supervises the activities of credits
- Not fixed and high interest rate
- No need of paper work
- Eg : relatives, moneylenders, family and friends etc.
Functions Of RBI
- The Reserve Bank Of India supervise the functioning of banks and all formal sources of loans.
- RBI monitor the banks actually maintaining the minimum cash balance that is 15% of total deposits
- Periodically banks have to submit information to the RBI that how much they are lending, to whom, at what interest rate etc.
Who Take Loans From Banks And Why ?
- People who are less educated
- Do not have banks nearby
- Absence of collateral
Self Help Groups Of The People
- The idea is to organize rural poor, particular women, into small Self Help Groups (SHGs) to pool (collect) their savings for the time of need.
- Usually typical Self Help Group has 15-20 members, belonging to one neighborhood, who meet and save regularly.
- Saving per member varies from Rs 25 to Rs 100 or more, depending on the capacity of the people to save.
- Members can take small loans from the group itself to fulfill their needs.
- If the group is regular in savings, it becomes eligible for availing loan from the bank, and their savings could be used as their collateral.
- Small loans are provided to the members for meeting working capital needs (e.g. buying fertilizers, pesticides, seeds, raw materials like bamboo and cloth), for housing materials, for acquiring assets like sewing machine, handlooms, cattle, etc.
- Because of this feature, In any case of non-repayment of loan by any one member is followed up seriously by other members in the group.
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