Money and Credit

An essential condition for barter system. Both parties have to agree to sell and buy each other's commodities. Money eliminates this need.

Anything that acts as a medium of exchange in transactions. It is an intermediate step.

Paper notes and coins. Unlike grain/cattle, they have no intrinsic value. They are accepted because authorized by the government.

The Reserve Bank of India (RBI) on behalf of the Central Government. No other individual can issue currency.

Deposits in bank accounts that can be withdrawn on demand. They act like money (Checkable deposits).

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. Payment without cash.

They keep a small proportion (15%) of deposits as cash. The rest is used to extend loans. The difference between interest charged on loans and interest paid on deposits is their income.

An agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payment.

1. Positive: Helps increase earnings (Salim the shoemaker). 2. Negative: Debt Trap. Borrower is worse off (Swapna the farmer).

An asset (land, building, vehicle, livestock, deposits) that the borrower owns and uses as a guarantee to a lender until the loan is repaid.

Interest rate, collateral, documentation requirement, and mode of repayment.

Loans from Banks and Cooperatives. Supervised by RBI. Low interest. (Rich households use this).

Loans from moneylenders, traders, employers, relatives, friends. No supervision. High interest. Unfair means. (Poor households depend on this).

For country's development. It allows people to invest in agriculture, business, or small scale industry without falling into a debt trap.

Groups of 15-20 rural women who pool their savings. They lend mainly to members at low interest. Collateral is not required. They help women became self-reliant.

1. Issues currency. 2. Supervises banks (keeps cash balance). 3. Ensures banks lend to small borrowers, not just profit-making businesses.

Prof. Muhammad Yunus (Nobel Winner). It proved poor women are reliable borrowers.

Lack of collateral (security) and documents.

A situation where credit pushes the borrower into a situation from which recovery is very painful (e.g., selling land to pay loan).

Exchange of goods for goods.

RBI issues notes on behalf of Govt.

Rupee is legal tender in India.

Banks keep 15% cash reserve.

Loan activities mediate between surplus and deficit units.

Interest on loans > Interest on deposits.

Moneylenders charge very high interset (e.g., 5% per month).

Banks charge lower interest (e.g., 8-10% per year).

85% of loans taken by poor households are Informal.

90% of loans taken by rich households are Formal.

Banks/Cooperatives need to expand in rural areas.

SHGs are building blocks of rural poor.

SHGs discuss health, nutrition, domestic violence.

Grameen Bank has 9 million members.

Formal sector share is about half of total credit.

Cooperatives provide cheap credit.

Documentation is a hurdle for poor.

Collateral is main reason for rejection.

Kisan Credit Card helps farmers.

Money is a store of value.

Money is a unit of account.

Grameen Bank Nobel Prize