Money as a Medium of Exchange
Barter System - Goods are directly exchanged without the use of money, double coincidence of wants is an essential feature.
In an economy where money is in use, money by providing the crucial intermediate step eliminates the need for double coincidence of wants. A person holding money can easily exchange it for any commodity or service that he or she might want. Since money acts as an intermediate in the exchange process, it is called a medium of exchange
Modern Forms of Money
Early coins were made of precious metals thus they had their own value
Modern forms of money include currency - paper notes and coins (not made of precious metals), without any use of its own. It is accepted as a medium of exchange because the currency is authorized by the government of the country. Reserve Bank of India issues currency notes on behalf of the central government. No individual in India can legally refuse a payment made in rupees.
Deposites with Banks
People hold money as deposits with banks. Banks accepts the deposites, in Banks money is safe and it earn an amount as interest.
Since the deposits in the bank accounts can be withdrawn on demand, these deposits are called demand deposits. Since demand deposits are accepted widely as a means of payment, along with currency, they constitute money in the modern economy.
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.
Loan Activities of Banks
Banks in India these days hold about 15 percent of their deposits as cash, as a provision to pay the depositors who might come to withdraw money from the bank at any given day. Banks use the major portion of the deposits to extend loans. Banks mediate between those who have surplus funds (the depositors) and those who are in need of these funds (the borrowers). The difference between what is charged from borrowers and what is paid to depositors is their main source of income.
Two different Credit situations
Credit - Refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payment
Credit which leads to profit - Salim, the Shoe manufacturer recieved an order of 3000 pair of shoes to be delivered in month time. Salim asks the leather supplier to supply leather now and promises to pay later. He obtains loan in cash from the large trader as advance payment for 1000 pair of shoes. Is able to deliver the order in time, makes a good profit.
Credit which leads to debt - Swapna, a small farmer, borrows loan from the moneylender hoping that her harvest would help repay the loan. The crop is hit by pests and the crop fails. Swapna is unable to repay the moneylender, takes a fresh loan for cultivation next year. Its a normal crop this year, earnings are not enough to cover the old loan. She is caught in debt.
Conclusion - Whether credit would be useful or not depends on the risks in the situation and whether there is some support in case of loss
Terms of Credit
Collateral - An asset that the borrower owns and uses this as a guarantee to alender until the loan is repaid
Terms of Credit include Loan amount, Duration of loan, Documents required, Interest rate, Mode of Repayment, Collateral
Formal Sector Credit in India
The various types of loans can be conveniently grouped as formal sector loans and informal sector loans. The formal are loans from banks and cooperatives. The informal lenders include moneylenders, traders, employers, relatives and friends, etc.
“RBI (Reserve Bank of India) supervises the functioning of Formal sources of Loans”
RBI monitors the banks in maintaining the minimum cash balance
RBI sees that the banks give loans not just to profit-making businesses and traders but also to small cultivators, small scale industries, to small borrowers etc.
“Cheap and affordable credit is crucial for the country’s development”
Compared to the formal lenders, most of the informal lenders charge a much higher interest on loans
Higher cost of borrowings means a larger part of the earnings of the borrowers is used to repay the loan
High interest rate for borrowing can mean that the amount to be repaid is greater than the income of the borrower, can lead to increasing debt
Banks and cooperative societies need to lend more, would lead to higher incomes and many people could then borrow cheaply for a variety of needs
Formal and Informal Credit : Who gets what ?
85 percent of the loans taken by poor households in the urban areas are from informal sources. Rich households take only 10 per cent of their loans from informal sources, while 90 per cent are from formal sources
The rich households are availing cheap credit from formal lenders whereas the poor households have to pay a large amount for borrowing
Formal sector still meets only about half of the total credit needs of the rural people. The remaining credit needs are met from informal sources,it carries a very high interest rate and do little to increase the income of the borrowers
Thus it is necessary that banks and cooperatives increase their lending particularly in the rural areas, also necessary that everyone receives these loans
Self-Help Groups for the Poor
Need of SHG - Banks are not present everywhere. Getting a loan from a bank is much more difficult than taking a loan from informal sources, banks require proper documents and collateral. The borrowers approach the moneylenders even without repaying their earlier loans. Moneylenders charge very high rates of interest, keep no records of the transactions and harass the poor borrowers
Concept of SHG - Self Help Groups a group of 15-20 members, meet and save regularly. Saving per member varies from Rs. 25 to Rs. 100 or more. Members can take small loans, group charges interest less than what the moneylender charges. If the group is regular in savings, it becomes eligible for availing loan from the bank. Loan is sanctioned in the name of the group and is meant to create self-employment opportunities. Important decisions regarding the savings and loan activities are taken by the group member. It is the group which is responsible for the repayment of the loan. Cases of non-repayment of loan are followed up seriously by other members in the group.
SHG help borrowers overcome the problem of lack of collateral, can get timely loans at a reasonable interest rate. It helps women to become financially self-reliant, provides a platform to discuss and act on a variety of social issues such as health, nutrition, domestic violence, etc.
Barter System - Goods are directly exchanged without the use of money, double coincidence of wants is an essential feature.
In an economy where money is in use, money by providing the crucial intermediate step eliminates the need for double coincidence of wants. A person holding money can easily exchange it for any commodity or service that he or she might want. Since money acts as an intermediate in the exchange process, it is called a medium of exchange
Modern Forms of Money
Early coins were made of precious metals thus they had their own value
Modern forms of money include currency - paper notes and coins (not made of precious metals), without any use of its own. It is accepted as a medium of exchange because the currency is authorized by the government of the country. Reserve Bank of India issues currency notes on behalf of the central government. No individual in India can legally refuse a payment made in rupees.
Deposites with Banks
People hold money as deposits with banks. Banks accepts the deposites, in Banks money is safe and it earn an amount as interest.
Since the deposits in the bank accounts can be withdrawn on demand, these deposits are called demand deposits. Since demand deposits are accepted widely as a means of payment, along with currency, they constitute money in the modern economy.
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.
Loan Activities of Banks
Banks in India these days hold about 15 percent of their deposits as cash, as a provision to pay the depositors who might come to withdraw money from the bank at any given day. Banks use the major portion of the deposits to extend loans. Banks mediate between those who have surplus funds (the depositors) and those who are in need of these funds (the borrowers). The difference between what is charged from borrowers and what is paid to depositors is their main source of income.
Two different Credit situations
Credit - Refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payment
Credit which leads to profit - Salim, the Shoe manufacturer recieved an order of 3000 pair of shoes to be delivered in month time. Salim asks the leather supplier to supply leather now and promises to pay later. He obtains loan in cash from the large trader as advance payment for 1000 pair of shoes. Is able to deliver the order in time, makes a good profit.
Credit which leads to debt - Swapna, a small farmer, borrows loan from the moneylender hoping that her harvest would help repay the loan. The crop is hit by pests and the crop fails. Swapna is unable to repay the moneylender, takes a fresh loan for cultivation next year. Its a normal crop this year, earnings are not enough to cover the old loan. She is caught in debt.
Conclusion - Whether credit would be useful or not depends on the risks in the situation and whether there is some support in case of loss
Terms of Credit
Collateral - An asset that the borrower owns and uses this as a guarantee to alender until the loan is repaid
Terms of Credit include Loan amount, Duration of loan, Documents required, Interest rate, Mode of Repayment, Collateral
Formal Sector Credit in India
The various types of loans can be conveniently grouped as formal sector loans and informal sector loans. The formal are loans from banks and cooperatives. The informal lenders include moneylenders, traders, employers, relatives and friends, etc.
“RBI (Reserve Bank of India) supervises the functioning of Formal sources of Loans”
RBI monitors the banks in maintaining the minimum cash balance
RBI sees that the banks give loans not just to profit-making businesses and traders but also to small cultivators, small scale industries, to small borrowers etc.
“Cheap and affordable credit is crucial for the country’s development”
Compared to the formal lenders, most of the informal lenders charge a much higher interest on loans
Higher cost of borrowings means a larger part of the earnings of the borrowers is used to repay the loan
High interest rate for borrowing can mean that the amount to be repaid is greater than the income of the borrower, can lead to increasing debt
Banks and cooperative societies need to lend more, would lead to higher incomes and many people could then borrow cheaply for a variety of needs
Formal and Informal Credit : Who gets what ?
85 percent of the loans taken by poor households in the urban areas are from informal sources. Rich households take only 10 per cent of their loans from informal sources, while 90 per cent are from formal sources
The rich households are availing cheap credit from formal lenders whereas the poor households have to pay a large amount for borrowing
Formal sector still meets only about half of the total credit needs of the rural people. The remaining credit needs are met from informal sources,it carries a very high interest rate and do little to increase the income of the borrowers
Thus it is necessary that banks and cooperatives increase their lending particularly in the rural areas, also necessary that everyone receives these loans
Self-Help Groups for the Poor
Need of SHG - Banks are not present everywhere. Getting a loan from a bank is much more difficult than taking a loan from informal sources, banks require proper documents and collateral. The borrowers approach the moneylenders even without repaying their earlier loans. Moneylenders charge very high rates of interest, keep no records of the transactions and harass the poor borrowers
Concept of SHG - Self Help Groups a group of 15-20 members, meet and save regularly. Saving per member varies from Rs. 25 to Rs. 100 or more. Members can take small loans, group charges interest less than what the moneylender charges. If the group is regular in savings, it becomes eligible for availing loan from the bank. Loan is sanctioned in the name of the group and is meant to create self-employment opportunities. Important decisions regarding the savings and loan activities are taken by the group member. It is the group which is responsible for the repayment of the loan. Cases of non-repayment of loan are followed up seriously by other members in the group.
SHG help borrowers overcome the problem of lack of collateral, can get timely loans at a reasonable interest rate. It helps women to become financially self-reliant, provides a platform to discuss and act on a variety of social issues such as health, nutrition, domestic violence, etc.
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