MONEY AND CREDIT
Money as a Medium of Exchange : Money is an item which is used as a medium of exchange. In the modern economy, money is work as an intermediary. It is used as a medium of exchange for goods and services. It is also used for payment of debts. Introduction of money replaced the barter system. Before the introduction of money, Indians used grains and cattle as money. In a barter system, selling and purchasing of goods and services was done with “double coincidence of wants” i.e by fulfilling mutual wants without the use of money. In this system goods and services were exchanged for other goods and services. It was also known as commodity for commodity economy.
Modern Forms of Money : Before the introduction of coins, a variety of objects was used as money. For example, since the very early ages, Indians used grains and cattle as money.
Currency : Modern forms of money include currency – paper notes and coins. Money is accepted as a medium of exchange because the currency is authorized by the government of the country. In India, the Reserve Bank of India issues currency notes on behalf of the central government. As per Indian law, no other individual or organization is allowed to issue currency and no individual in India can legally refuse a payment made in rupees.
Deposits with Bank : Deposits in the bank account that can be withdrawn on demand. People need only some currency for their day to day needs. For instance workers who receive their salaries at the end of each month, have some extra cash. They deposit it with the banks by opening a bank account in their name. Banks accept the deposits and also pay an interest rate on the deposits. People also have the provision to withdraw the money as and when they require. Since the deposits in the accounts can be withdrawn on demand, these deposits are called demand deposits. Payments can be made through Cheques instead of cash. For payment by Cheque, the buyer who has an account with the bank, makes out a Cheque for a specific amount. 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. The facility of Cheque against demand deposits makes it possible to directly settle payments without the use of cash. Since demand deposits are accepted widely as a means of payment, along with currency, they constitute money in the modern economy.
Loan activities of Banks : Banks keep only a small proportion of their deposits as cash with themselves. This is kept as a provision to pay the depositors who might come to withdraw money from the bank on any given day. Banks use the major portion of the deposits to extend loans. There is a huge demand for loans for various economic activities. Banks make use of the deposits to meet the loan requirements of the people. In this way, banks mediate between those who have surplus funds and those who are in need of these funds. Banks charge a higher interest rate on loans than what they offer on deposits. 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 (loan) refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payment. In the case of Salim, he obtains credit to meet the working capital needs of production. Therefore here credit plays a vital and positive role for Salim. In the case of Swapna, credit pushes the browser ( Swapna) into a debt trap.
Terms of Credit : Every loan agreement specifies an interest rate which the borrower must pay to the lender along with the repayment of the principal addition, lenders may demand collateral(security)against the loan. Collateral is an asset that the borrower owns and uses this as a guarantee to a lender until the loan is repaid. The interest rate, collateral and documentation requirement, and the mode of repayment together comprise what is called the terms of credit. The term of credit vary substantially from one credit arrangement to another. They may vary depending on the nature of the lender and borrower.
Formal Sector Credit in India : Cheap and affordable credit is crucial for the country’s development. The various types of loans can be grounded as - Formal sector loans: These are the loans from banks and cooperatives. The RBI supervises the functioning of formal sources of loans. Banks have to submit information to the RBI on how much they are lending, to whom, at what interest rate etc. Informal sector: These are the loans from money lenders, traders, employers, relatives and friends etc. there is no organization which supervises the credit activities of lenders in the informal sector. There is no one to stop them from using unfair means to get their money back. Formal and informal credit: The formal sector meets only about half of the total credit needs of the rural people. The remaining credit needs are met from informal sources. It is important that formal credit is distributed to more people equally so that the poor can benefit from cheaper loans. It is necessary that banks and cooperatives increase their lending, particularly in rural areas, so that the dependence on informal sources of credit reduces. While the formal sector loans need to expand, it is also necessary that everyone receives these loans.
Self- Help Groups : Poor households are still dependent on informal sources of credit. Banks are not present everywhere in rural India. Even when they are present, getting a loan from a bank is much more difficult than taking a loan from informal sources. The absence of collateral is one of the major resources which prevent the poor from getting the bank loans. Informal lenders such as moneylender, on the other hand. Known the borrowers personally and hence are oen willing to give a loan without collateral. However, the moneylenders charge very high rates of interest, keep no records of the transactions and harass the poor borrower. In recent years, people had tried out some newer ways of providing loans to the poor. A typical SHG has 15-20 members usually belonging to a neighborhood, who meet and save regularly. Saving per month varies from 25-100 rupees or more depending upon the ability of the people. Members take small loans from the group itself to meet their needs.
Advantages of SHFs are: It helps borrowers to overcome the problem of lack of collateral. People can get timely loans for a variety of purposes and at a reasonable interest rate. SHGs are the building blocks of organization of the rural poor. It helps 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.
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