STD-X Money and credit notes
Money and Credit
Barter System: The barter system was
used before the advent of money. People used to exchange one thing for another
in this system.
Double
Coincidence of wants: The
double coincidence of wants is the major drawback of the barter system. It can be very difficult
to find a person who can fulfill this condition. Suppose you want to barter
your MP3 player with a game console, then you need to find a person who wants
to barter his game console for an MP3 player.
Money
Money is a means by which we can get something in
exchange. Initially, coins came into use. The coins were initially made of
precious metals; like gold and silver. When the precious metals became too
precious, ordinary metals were being used for making coins. Paper money or currency
notes gradually took place of coins; although coins of smaller denominations
are still in use.
The currency notes and
coins are issued by the government of an authorized body. In India, the RBI
(Reserve Bank of India) issues currency notes. On the Indian currency note, you
can find a statement which promises to pay the bearer the amount which is
mentioned on the currency note.
Advantages of Money:
- Removes the coincidence of wants.
- Takes less storage space and is
easier to carry.
- Liquidity of currency is easier.
- Now-a-days; many instruments are
available through which it is not necessary to physically carry the
currency.
Other Forms of Money
Deposits with Banks: Most of the people
need only some currency for their daily needs. Rest of the amount is usually
kept as deposit in banks. Money which is kept in a bank JAY is safe and it even earns an interest. One can
withdraw money from his account as and when required. Since deposit in the bank
account can be withdrawn on demand, these deposits are called demand deposits.
One can use a cheque;
instead of cash to settle payments. Moreover, one can also buy a demand a draft from a bank to make payments.
Credit: Banks keep a small proportion of their
deposits as cash with themselves. This is usually 157% of their deposits as
cash. This amount is kept as provision to pay the depositors who may come to
withdraw the money on any day. This amount is enough because only a small
fraction of people come to withdraw money on a given day. The rest of there
amount is used by the banks to give money on credit to people whose need the
credit. At bank charges interest on the loan which it gives to its creditors.
These interest rate charged by a bank no loans is higher than the interest rate
given by it on deposits. Thus, interest is the main source of income for banks.
Terms of Credit
People often need form
borrow money for various purposes. Many businessmen need to borrow to buy raw
materials and machineries. Many farmers need to borrow to buy seeds, fertilizers,
farm equipments, etc. People usually buys vehicles and houses by borrowing from
banks. Thus, credit plays an important role in the economy.
Every loan agreement
specifies terms and conditions; regarding there rate of interest and terms of
payment. In most of two cases, the banks fixed an EMI (Equated Monthly
Installment) form repayment of loan.
Collateral: An asset
we is owned by their borrower and is used as a guarantee to a lender until the
loan is repaid is called these collateral. Landes, house, vehicle, livestocks,
deposits with banks, insurance policy, gold, etc. are examples of assets. If
the borrower fails to repay the loan, these blender reserves the right to sell
the collateral to obtain payment.
Terms of
Credit: The terms of credit include rate of interest, collateral and
mode of repayment. The terms of credit varies from one loan agreement to
another and also on the nature of the lender and the borrower.
Sources of Credit
Formal Sector: The
formal Sector comprises of banks and cooperative societies.
Informal
Sector: The informal sector consists of money lenders and friends
and relatives, merchants and lords.
The following diagram
shows share of different sources of credit in rural households in India in
2003.
While the formal sector is
bound by the rules and regulations of the RBI and charge the prevalent rate of
interest as per RBI guidelines; the informal lenders are not bound by such
rules. The informal lenders usually charge a very high rate of interest. A
higher cost of borrowing is often detrimental to the borrower. It usually
results in a debt trap for the borrower. The borrower is seldom able to escaps
the never ending cycle of loan repayment.
Many people are too poor
to qualify the requirements of credit-worthiness of banks and cooperatives. There
are many others who may not have enough documents; like residential certificate
or income certificate. Such people are usually at the mercy of informal
lenders.
Self Help Groups
Self Help Groups (SHGs)
are recent phenomena. An SHG is comprised of small number of people; like 5 –
20 members. The members pool their savings. The collection is then utilised to
lend small amounts of money which may be required by any of the members. The
group charges interest on the loan. The arrangement of loans through Self Help
Groups is also known as microfinance because the small amount of loan is
involved.
It was the Grameen Bank of
Bangladesh which began experimenting with microfinance. The founder of Grameen
Bank, Mohammad Yunus was conferred with Nobel Prize in 2006 for his efforts at
improving the lot of the poor.
SHGs have helped immensely
in reducing the influence of informal lenders in rural areas. Many big
corporate houses are also promoting SHGs at many places in India.
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