Details — Money and Credit

1. Money as a Medium of Exchange

Without money, exchange needs double coincidence of wants — what you sell is exactly what the other wants to buy (shoe maker must find farmer who wants shoes and sells wheat).

Money acts as intermediate step → everyone accepts money → then buys what they need. Hence money is a medium of exchange.

2. Modern Forms of Money

Historical forms (India)

Grains and cattle → metallic coins (gold, silver, copper) → modern currency.

Currency

Paper notes and coins — not precious metal; no everyday use of their own. Accepted because authorised by government. In India, RBI issues currency notes on behalf of the central government. No other individual/organisation may issue currency. Law legalises rupee; no one can legally refuse payment in rupees.

Demand deposits

Extra cash deposited in bank accounts; earn interest; withdrawable on demand → demand deposits.

Cheques: Paper instructing bank to pay a specific amount from payer’s account to payee. Demand deposits + cheque facility share essential features of money; with currency they constitute money in modern economy.

Teacher notes (demonetisation context): Nov 2016 — Rs 500 and Rs 1000 notes declared invalid; digital transactions encouraged (internet/mobile transfers, cards, POS, UPI). Mark as from notes for teachers if used beyond core chapter narrative.

3. Loan Activities of Banks

Banks keep about 5% of deposits as cash for daily withdrawals (as stated in the chapter).
Major portion used for loans.
Banks mediate between surplus holders (depositors) and those needing funds (borrowers).
Charge higher interest on loans than they pay on deposits → main income.

4. Two Credit Situations

	Salim (festival order)	Swapna (groundnut)
Need	Working capital — workers, raw material	Cultivation expenses
Sources	Leather supplier credit; trader advance	Moneylender
Outcome	Delivers order, profit, repays	Crop fails → debt grows → sells land
Lesson	Credit can raise earnings	Credit can cause debt-trap

Whether credit helps depends on risks and whether there is support in case of loss.

Rural crop loans: costs on seeds, fertilisers, etc.; 3–4 months gap before harvest sale; repayment depends on farm income.

5. Terms of Credit

Together comprise:

Interest rate
Collateral (security) — asset borrower owns (land, building, vehicle, livestock, bank deposits) as guarantee; lender can sell if unpaid
Documentation
Mode of repayment

Example — Megha house loan: Rs 5 lakh; 12% annual interest; 10 years monthly instalments; employment/salary documents; house papers as collateral.

Terms vary by lender and borrower.

6. Variety of Credit in Sonpur (village examples)

Person	Source	Terms / notes
Shyamal (1.5 acres)	Earlier moneylender 5%/month (60% p.a.); later trader 3%/month + must sell crop to trader	Cheap after harvest prices help trader
Arun (7 acres)	Bank 8.5% p.a.; repay anytime in 3 years; cold storage receipt for fresh loan	One of few with bank loan
Rama (labourer)	Employer-landowner 5%/month; repay by working; owes Rs 5000	Landless depend on employers

Cooperatives: Members pool resources. Krishak Cooperative — 2300 farmer members; deposits as collateral for bank loan; lends for implements, cultivation, trade, fishery, housing, etc.

7. Formal vs Informal Credit

Formal	Informal
Banks, cooperatives	Moneylenders, traders, employers, relatives, friends
Supervised by RBI	No supervising organisation
Lower interest generally	Much higher interest often
Need documents/collateral	Often no collateral; personal knowledge

RBI supervision: Monitors cash balance maintenance; ensures loans not only to profit businesses but also small cultivators, small industries, small borrowers; banks periodically report lending details.

Rural credit 2019 (Graph 1): Commercial banks 51%; moneylenders 23%; cooperatives 10%; relatives/friends 7%; other formal 5%; other informal 3%; landlords 1%. Formal still meets only about half of rural credit needs.

Urban pattern: Poor households — 54% loans informal; rich — only 17% informal, 83% formal. Similar rural pattern: rich get cheap formal credit; poor pay more.

Why expand formal credit? Higher borrowing cost → less income left → debt-trap risk → people may not start enterprises. Cheap affordable credit crucial for country’s development. Also need more equal distribution so poor benefit.

Why poor depend on informal? Banks not everywhere; loans need documents/collateral; moneylenders lend without collateral (even before old loan repaid) but high interest, no records, harassment.

8. Self-Help Groups (SHGs)

Organise rural poor, especially women; pool savings.
Typical 15–20 members, one neighbourhood; save regularly (Rs 25–100+).
Small loans from group at interest still below moneylender.
After 1–2 years regular savings → eligible for bank loan in group’s name for self-employment (release mortgaged land, working capital, housing materials, assets like sewing machine, cattle, etc.).
Group decides purpose, amount, interest, repayment; group responsible for repayment → banks lend even without individual collateral.
Builds financial self-reliance; meetings discuss health, nutrition, domestic violence, etc.

Grameen Bank (Bangladesh)

Founded idea associated with Professor Muhammad Yunus (Nobel Peace Prize 2006). Started 1970s; by 2018 over 9 million members in about 81,600 villages; almost all borrowers women from poorest sections — reliable borrowers running small activities.

Quote idea: small credit on appropriate terms can create big development wonder.