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1. HELLO! I am rohit I am here because I love to teach For any query contact Rohit sir (7417394443)

2. MONEY AND CREDIT Introduction Barter System

3. INTRODUCTION The use of money spans a very large part of our everyday life. Look around you and you would easily be able to identify several transactions involving money in any single day. In many of these transactions, goods are being bought and sold with the use of money. In some of these transactions, services are being exchanged with money. For some, there might not be any actual transfer of money taking place now but a promise to pay money later. TICKET COUNTER Movies TICKET COUNTER Movies Materials that satisfy Human wants. Facilities that satisfy Human wants.

4. TICKET COUNTER Movies Have you ever wondered why transactions are made in money? The reason is simple. A person holding money can easily exchange it for any commodity or service that he or she might want. But many years ago there was a moneyless economy called as Barter Economy. In this Economy Trade took place without ‘Money’ being used. INTRODUCTION

5. Barter  is a system of exchange by which goods or services are directly exchanged for other goods or services without using a medium of exchange, such as money. I will give you pots for your wheat. I will sell you wheat for your Pots. I want wheat I want Pots Both parties agree to sell and buy each others commodities. There is Double Coincidence of Wants. BARTER SYSTEM The most important feature of Barter System is Double Coincidence of Wants. Barter System What a person desires to sell is exactly what the other wishes to buy. But Double Coincidence of Wants was not possible every time. Potter Wheat Seller

6. PROBLEM OF BARTER SYSTEM I will give Pots for your wheat. I don’t need Pots. I need Clothes Here there is a lack of Double Coincidence of Wants. Now potter has to lookout for a person who is ready to buy his pots in exchange of wheat. Problem of Barter System led to the introduction of ‘Money’. Money eliminates the need for Double Coincidence of Wants. Let us see how? Potter Wheat Seller

7. MONEY AS A MEDIUM OF EXCHANGE Money acts as an intermediate in the exchange process, so it is called a ‘Medium of Exchange’. Money eliminates the need for Double Coincidence of Wants. The potter wanting to buy wheat, has to find a buyer for his pots. Once the Potter has exchanged his pots for money, he can purchase wheat from the market. I want wheat

8. Mention any three limitations of the Barter System. How does money solve the problem of double coincidence of wants? Explain with an example of your own? U E S T I O N S M O D U L E B A S E D -

9. MONEY AND CREDIT Ancient Forms of Money Modern Forms of Money (Currency)

10. ANCIENT FORMS OF MONEY In ancient times a variety of objects was used as money. For example, since the very early ages, Indians used grains and cattle as money, known as ‘Commodity Money’. Thereafter came the use of ‘Metallic Money’— gold, silver, copper coins — a phase which continued well into the last century. COMMODITY MONEY METALLIC MONEY Animal Skin Sea shells Gold Coins Silver Coins Copper Coins

11. ANCIENT FORMS OF MONEY COMMODITY MONEY METALLIC MONEY Animal Skin Sea Shells Everyday Use Articles Precious Metals

12. MODERN FORMS OF MONEY Currency : Deposits with Banks :

13. MODERN FORMS OF MONEY Currency : Modern forms of money include currency — paper notes and coins. The modern currency is without any use of its own.

14. Then, why is it accepted as a medium of exchange? It is accepted as a medium of exchange because the currency is authorised by the government of the country. MODERN FORMS OF MONEY Currency :

15. MODERN FORMS OF MONEY In India, the Reserve Bank of India issues currency notes on behalf of the central government. As per Indian law, no other individual or organisation is allowed to issue currency. Currency :

16. Moreover, the law legalises the use of rupee as a medium of payment that cannot be refused in settling transactions in India. No individual in India can legally refuse a payment made in rupees. Hence, the rupee is widely accepted as a medium of exchange. MODERN FORMS OF MONEY Currency :

17. MONEY MODERN FORMS OF MONEY ANCIENT FORMS OF MONEY Commodity Money Metallic Money Everyday Use Articles Precious Metals Paper Notes Coins Not Everyday Use Articles Not Precious Metals MODERN FORMS OF MONEY are authorised by the government of the country.

18. Look at ` 10 note. What is written on top? Can you explain this statement? Why is modern currency accepted as a medium of exchange without any use of its own? Find out the reason. U E S T I O N S M O D U L E B A S E D -

19. MONEY AND CREDIT Modern Forms of Money (Deposits with Banks)

20. MODERN FORMS OF MONEY Currency : Deposits with Banks :

21. MODERN FORMS OF MONEY Deposits with Banks : The other form in which people hold money is as deposits with banks. At a point of time, 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 extra cash at the beginning of the month. What do people do with this extra cash? They deposit it with the banks by opening a bank account in their name. Banks accept the deposits and also pay an amount as interest on the deposits. In this way people’s money is safe with the banks and it earns an amount as interest. People also have the provision to withdraw the money as and when they require. Since the deposits in the bank accounts can be withdrawn on demand, these deposits are called ‘Demand Deposits’. Passbook : Mr. John A/c Number : xxxxxxx Deposit Withdrawal Balance Particulars Interest Rs. xxx Rs. xxxx Cash Rs. xxxx Rs. xxxx Cash Rs. xxx Rs. xxxx Demand Deposits The word bank was borrowed from an Old French word ‘banque’, meaning ‘table’.

22. MODERN FORMS OF MONEY Demand deposits offer another interesting facility which lends it the essential characteristics of money (that of a medium of exchange). We have often heard of payments being made by cheques instead of cash. But what is a cheque? 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. Deposits with Banks : For example, The facility of cheque against demand deposits make it possible to directly settle payments without the use of cash.

23. MODERN FORMS OF MONEY Mr. Salim a shoe manufacturer has to make payment to the supplier, Mr. Prem Kumar. Mr. Salim is the payer & Mr. Prem Kumar is the payee. Deposits with Banks : Mr. Salim Mr. Prem Kumar Payer PAYMENT Payee For example,

24. MODERN FORMS OF MONEY Mr. Salim Deposits with Banks : PREM KUMAR For payment through cheque, Mr. Salim, who has an account with the SBI bank, draws a cheque on Mr. Prem Kumar for a sum of fifty seven thousand rupees with a date & his sign on it . 57,000 /- Mr. Salim, also mentions A/c payee on the top left hand corner of the cheque. FIFTY SEVEN THOUSAND RUPEES ONLY A/c Payee 01 10 15 This means the amount will be transferred directly to the payee’s account. i.e to Mr. Prem Kumar’s Account. Cheque Number Coding used by banks for transfer of money. Cheque Printer Details / CTS No. CTS – Cheque Truncation System, is a project undertaken by the Reserve Bank of India (RBI) since 2008, for faster clearing of cheques. Bank Branch Code

25. MODERN FORMS OF MONEY Mr. Salim Mr. Salim gives this cheque to the supplier. Deposits with Banks : PREM KUMAR 57,000 /- FIFTY SEVEN THOUSAND RUPEES ONLY A/c Payee 01 10 15

26. MODERN FORMS OF MONEY CBI BANK Mr. Salim gives this cheque to the supplier. Mr. Prem Kumar The supplier then takes the cheque and deposits it in his own account. Mr. Salim Deposits with Banks : The specified amount i.e. Fifty Seven Thousand Rupees gets transferred from Mr. Salim’s account to the supplier’s account. Thus we see that demand deposits share the essential features of money. Thus, the transaction is complete without the use of money. MONEY TRANSFER MONEY TRANSFERRED Rs. 57,000

27. MODERN FORMS OF MONEY Deposits with Banks : Advantages 1. People’s Money remains safe with bank. 2. Provision to withdraw cash as and when people require. 3. The facility of cheque against demand deposits make it possible to directly settle payments without the use of cash.

28. Which type of deposits with the banks are called demand deposits? State some important features of demand deposits. Why are the demand deposits considered as money? U E S T I O N S M O D U L E B A S E D -

29. MONEY AND CREDIT Loan Activities of Banks Functions of the RBI

30. LOAN ACTIVITIES OF BANKS Depositors Borrowers This is a Commercial Bank. All Commercial Banks accepts deposits & lends loans. But are all the deposits given as loan? Let us find out. 10 % Interest Banks earn interest from Borrowers. 8 % Interest Banks pay 8% rate of interest to Depositors. The difference between the two is the revenue of the bank. Let us suppose interest rate is 10 %. 2 % Interest

31. LOAN ACTIVITIES OF BANKS Borrowers Depositors Demand Deposits Rs 10,000 Cash for Withdrawals (15 %) - Rs 1,500 Cash Reserve Ratio (5%) - Rs 500 Statutory Liquidity Ratio (20%) - Rs 2,000 Loan to people Rs 6,000 Let the total Deposits in this commercial bank be Rs. 10,000. Banks keep 15% of their deposits as cash with themselves. This is kept as provision to pay the depositors who might come to withdraw money from the bank on any given day. Since, on any particular day, only some of its many depositors come to withdraw cash, the bank is able to manage with this cash. Also 5 % of the Bank’s deposits is compulsorily kept as a reserve with The Reserve Bank of India, Known as ‘Cash Reserve Ratio’. Another 20 % of the Deposits as a Statutory Liquidity Ratio(SLR). Statutory Liquidity Ratio(SLR) is the reserve requirement that the Commercial Banks are required to maintain in form of government securities. The remaining % of the deposits is extended as loans to people. In this way, banks mediate between those who have surplus funds (the depositors) and those who are in need of these funds (the borrowers). Statutory Liquidity Ratio (20%)

32. The Reserve Bank of India supervises the functioning of formal sources of loans. HOW 1. The RBI regulates the money supply in the economy. FUNCTIONS OF THE RBI

33. 2. The RBI monitors the banks in actually maintaining cash balance. Demand Deposits Rs 10,000 Cash for Withdrawals (15 %) - Rs 1,500 Cash Reserve Ratio (5%) - Rs 500 Statutory Liquidity Ratio (20%) - Rs 2,000 Loan to people Rs 6,000 Statutory Liquidity Ratio (20%) FUNCTIONS OF THE RBI

34. FUNCTIONS OF THE RBI 3. Similarly, the RBI sees that the banks give loans to… Profit-Making Businesses Traders Small Cultivators Small Scale Industries Small Borrowers

35. FUNCTIONS OF THE RBI 4. Periodically, banks have to submit information to the RBI on how much they are lending, to whom, at what interest rate, etc. INFORMATION SHEET INFORMATION SHEET INFORMATION SHEET How Much To Whom Interest Rate

36. How do banks mediate between those who have surplus money and those who need money? Which institution supervises the functioning of formal sources of credit in India? How does it supervise them? What role do the banks plays in the economy of the country? What do the banks do with the deposits which they accept from the public? Explain. U E S T I O N S M O D U L E B A S E D -

37. MONEY AND CREDIT Two Different Credit Situations

38. TWO DIFFERENT CREDIT SITUATIONS A large number of transactions in our day-to-day activities involve credit in some form or the other. 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. Let us see how credit works through the following two examples. Loan The word ‘Credit’ is derived from Latin Word ‘Credo’ which means ‘I Believe’.

39. It is festival season two months from now…

40. And the shoe manufacturer, Salim, has received an order…

41. from a large trader in town for 3,000 pairs of shoes…

42. to be delivered in a month of time.

43. To complete production on time,

44. Salim has to hire a few more workers for stitching…

45. and pasting work.

46. He has to purchase the raw materials.

47. To meet these expenses, Salim obtains loans from two sources.

48. First, he asks the leather supplier to supply leather now…

49. and promises to pay him later.

50. Second, he obtains loan in cash from the large trader as advance payment for 1000 pairs of shoes…

51. with a promise to deliver the whole order by the end of the month.

52. At the end of the month,

53. Salim is able to deliver the order,

54. make a good profit,

55. and repay the money that he had borrowed.

56. In this case, Salim obtains Credit to meet the working capital needs of production. TWO DIFFERENT CREDIT SITUATIONS The Credit helps him to meet the ongoing expenses of production, complete production on time, and thereby increase his earnings. It is a capital required by the business firm in its day to day activities.

57. TWO DIFFERENT CREDIT SITUATIONS Credit therefore plays a vital and positive role in this situation.

58. In rural areas, the main demand for credit is for crop production. Crop production involves considerable costs on seeds, fertilisers, pesticides, water, electricity, repair of equipment, etc. There is a minimum stretch of three to four months between the time when the farmers buy these inputs and when they sell the crop. Repayment of the loan is crucially dependent on the income from farming. TWO DIFFERENT CREDIT SITUATIONS

59. Swapna, a small farmer,

60. grows groundnut on her three acres of land.

61. She takes a loan from the moneylender to meet the expenses of cultivation,

62. hoping that her harvest would help repay the loan.

63. Midway through the season the crop is hit by pests

64. and the crop fails.

65. Though Swapna sprays her crops with expensive pesticides,

66. it makes little difference.

67. She is unable to repay the moneylender

68. and the debt grows over the year into a large amount.

69. Next year, Swapna takes a fresh loan for cultivation.

70. It is a normal crop this year.

71. But the earnings are not enough to cover the old loan.

72. She is caught in debt.

73. She has to sell a part of the land to pay off the debt.

74. TWO DIFFERENT CREDIT SITUATIONS Credit in this case pushes the borrower into a situation from which recovery is very painful.

75. TWO DIFFERENT CREDIT SITUATIONS Salim Swapna Credit in this case helps to increase earnings. Person is better off than before. Credit in this case pushes the borrower into a situation called Debt Trap . A situation in which a debt is difficult or impossible to pay. Person is worse off than before.

76. ‘’Credit is useful as well as harmful, it depends on the risk involved’’. Support the statement with examples. U E S T I O N S M O D U L E B A S E D -

77. MONEY AND CREDIT Terms of Credit

78. TERMS OF CREDIT

79. Megha has taken a loan of 5 lakhs from the bank to purchase a house.

80. The annual interest rate on the loan is 12 percent and the loan is to be repaid in 10 years in monthly instalments.

81. Megha had to submit to the bank, documents showing her employment records and salary…

82. before the bank agreed to give her the loan.

83. The bank retained as collateral the papers of the new house, Security

84. which will be returned to Megha only when she repays the entire loan with interest.

85. 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. In addition, lenders may demand collateral (security) against loans. Collateral is an asset that the borrower owns and uses this as a guarantee to a lender until the loan is repaid. Lender Borrower 15 % Interest & Collateral Collateral

86. Common examples of collateral used for borrowing are land titles, deposits with banks, vehicles. TERMS OF CREDIT If the borrower fails to repay the loan, the lender has the right to sell the asset or collateral to obtain payment. Collateral

87. ✔ Interest rate, collateral and documentation requirement, and the mode of repayment together comprise what is called the terms of credit. TERMS OF CREDIT The terms of credit vary substantially from one credit arrangement to another. They may vary depending on the nature of the lender and the borrower . The next section will provide examples of the varying terms of credit in different credit arrangements. ✔ Cash/Cheque

88. Explain with an example how theTerms of Credit can be unfavourable for the small farmers. Which documents are required to be submitted to the Bank for taking a house loan? U E S T I O N S M O D U L E B A S E D -

89. MONEY AND CREDIT Variety of Credit Arrangements

90. VARIETY OF CREDIT ARRANGEMENTS

91. Rohit and Ranjan had finished reading about the terms of credit in class. VARIETY OF CREDIT ARRANGEMENTS

92. They were eager to know the various credit arrangements that existed in their area;

93. Who were the people who provided credit?

94. Who were the borrowers?

95. What were the terms of credit?

96. They decided to talk to some people in their village. Read what they record….

97. 15 Nov 2006

98. Rohit & Ranjan head directly for the fields where most farmers and labourers would be working at this time of the day.

99. The fields are planted with potato crops.

100. Shyamal is a small farmer in Sonpur, a small irrigated village.

101. Shyamal Story Shyamal’s story

102. Shyamal tells us that every season he needs

103. loans for cultivation on his 1.5 acres of land.

104. Till a few years back, he would borrow money from the village moneylender

105. at an interest rate of five percent per month

106. (60% per annum).

107. For the last few years, Shyamal has been borrowing from an agricultural trader in the village

108. at an interest rate of 3% per month.

109. At the beginning of the cropping season, the trader supplies the farm inputs on credit,

110. which is to be repaid when the crops are ready for harvest.

111. Besides the interest charge on the loan, the trader also makes the farmers promise to sell the crop to him.

112. This way the trader can ensure that the money is repaid promptly.

113. Also, since the crop prices are low after the harvest,

114. The trader is able to make a profit from buying the crop at a low price from the farmers

115. and then selling it later when the price has risen.

116. Shyamal Occupation Land Source of Loan Interest Purpose of Loan Collateral Terms of Credit Farmer 1.5 Acres Agricultural Trader 3%p.m. Farming Crops Crops to be Sold to Agricultural Trader VARIETY OF CREDIT ARRANGEMENTS

117. Rohit & Ranjan next meet Arun who is supervising the work of one farm labourer.

118. Arun has seven acres of land.

119. He is one of the few persons in Sonpur to receive bank loan for cultivation.

120. The interest rate on the loan is 8.5 per cent per annum, and can be repaid anytime in the next three years.

121. Arun plans to repay the loan after harvest by selling a part of the crops.

122. He then intends to store the rest of the potatoes in a cold storage.

123. and apply for a fresh loan from the bank against the cold storage receipt.

124. The bank offers this facility to farmers who have taken crop loan from them.

125. Arun Occupation Land Source of Loan Interest Purpose of Loan Collateral Terms of Credit Farm Supervisor + Farmer 7 Acres Bank 8.5%p.a. Farming Receipt from Cold Storage 8.5%p.a. + Potatoes in Cold Storage VARIETY OF CREDIT ARRANGEMENTS

126. VARIETY OF CREDIT ARRANGEMENTS

127. Rama is working in a neighboring field.

128. She works as an agricultural labourer.

129. There are several months in the year when Rama has no work,

130. and needs credit to meet the daily expenses.

131. Expenses on sudden illnesses…

132. or functions in the family are also met through loans.

133. Rama has to depend on her employer,

134. A medium landowner in Sonpur for credit.

135. The landowner charges an interest rate of 5 % per month.

136. Rama repays the money by working for the landowner.

137. Most of the time, Rama has to take a fresh loan…

138. before the previous loan has been repaid.

139. At present, she owes the landowner Rs. 5,000.

140. Though the landowner doesn’t treat her well,

141. she continues to work for him

142. since she can get loans from him when in need.

143. Rama tells Rohit and Ranjan that only source of credit for the landless people in Sonpur are the landowner-employers.

144. VARIETY OF CREDIT ARRANGEMENTS Rama Occupation Land Source of Loan Interest Purpose of Loan Collateral Terms of Credit Agricultural Labourer Landless 5%p.m. Daily Expenses, Sudden Illnesses, Family Functions Working for the Land Owner 60%p.a. + Working for the Land Owner Land Owner

145. VARIETY OF CREDIT ARRANGEMENTS Shyamal Arun Rama Occupation Land Source of Loan Interest Purpose of Loan Collateral Terms of Credit Farmer 1.5 Acres Agricultural Trader 3%p.m. Farming Crops Crops to be Sold to Agricultural Trader Farm Supervisor + Farmer 7 Acres Bank 8.5%p.a. Farming Receipt from Cold Storage 8.5%p.a. + Potatoes in Cold Storage Agricultural Labourer Landless 5%p.m. Daily Expenses, Sudden Illnesses, Family Functions Working for the Land Owner 60%p.a. + Working for the Land Owner Land Owner

146. VARIETY OF CREDIT ARRANGEMENTS The terms of credit vary substantially from one credit arrangement to another. They may vary depending on the nature of the lender and the borrower.

147. Compare the terms of credit for the medium farmer, the small farmer and the landless farmers. U E S T I O N S M O D U L E B A S E D -

148. MONEY AND CREDIT Formal & Informal Credit

149. FORMAL & INFORMAL CREDIT Bank Cooperative Societies FORMAL SECTOR INFORMAL SECTOR Sources of Credit to Rural Households in India in 2012 E.g. banks and cooperatives. E.g. moneylenders, traders, employers, relatives and friends, etc. Zamindar Landowner

150. FORMAL & INFORMAL CREDIT Money Lender 33% Commercial Bank 25 % Coop Society/Bank 25% Relatives & Friends 8% Other Institutional Agencies 5 % Others 2 % Government 1 % Landlord 1 % Sources of Credit to Rural Households in India in 2012 In Graph you can see the various sources of credit to rural households in India. 56 % of the credit is available from Formal Sectors in 2012.

151. FORMAL & INFORMAL CREDIT Commercial Bank 42.9 % Agricultural/ Professional Money Lender 25.8% Coop Society 14.8% Relatives & Friends 9.1% Shopkeeper/Trader 2.9% Government 2.1% Others 1.6% Employer/ Landlord 0.8% THE ECONOMIC TIMES MUMBAI 24 APRIL 2015 Sources of Credit to Rural Households in India in 2012 59.8 % of the credit is available from Formal Sectors in 2013.

152. FORMAL & INFORMAL CREDIT Sources of Credit to Rural Households in India. 2012 More Credit should be available from Formal Sectors. 56 % of the credit is available from Formal Sectors in 2012. 59.8 % of the credit is available from Formal Sectors in 2013. 2013

153. FORMAL & INFORMAL CREDIT In Poor Household 85 % of their loans are from informal sources, while 15% are from formal sources. Urban Areas In Household with few assets 53 % of their loans are from informal sources, while 47% are from formal sources. In Well off Households only 28 % of their loans are from informal sources, while 72 % are from formal sources. While in Rich Households only 10 % of their loans are from informal sources, while 90 % are from formal sources. Rural Areas A similar pattern is also found in rural areas. The Rich Households are availing cheap credit from formal lenders… What does all this suggest? % of Loans from FORMAL Sector % of Loans from INFORMAL Sector 47 % 53 % 28 % 72 % Households with few assets Well off Households Who gets What? whereas the Poor Households have to pay a large amount for borrowing. 90 % Rich Households 10 % 85 % 15 % Poor Households

154. FORMAL & INFORMAL CREDIT The remaining credit needs are met from informal sources. Credit Needs of the Rural People Most loans from informal lenders carry a very high interest rate and do little to increase the income of the borrowers. Zamindar The formal sector still meets only about half of the total credit needs of the rural people. High Interest Rates Conclusion : 1 Borrowers

155. FORMAL & INFORMAL CREDIT Cooperative Societies Conclusion : 1 Thus, it is necessary that banks and cooperatives increase their lending particularly in the rural areas.

156. FORMAL & INFORMAL CREDIT 90 % Rich Households Formal Sector 85 % Poor Households Informal Sector Conclusion : At present, it is the richer households who receive formal credit whereas the poor have to depend on the informal sources. It is important that the formal credit is distributed more equally so that the poor can benefit from the cheaper loans. 2

157. FORMAL & INFORMAL CREDIT Conclusion : 2 Formal sector loans need to expand & it is also necessary that everyone receives these loans.

158. Which of the households are availing cheap credit? Why? % of Loans - FORMAL Sector % of loans - INFORMAL sector Poor Households 15% 85% Households with few assets 47% 53% Well off Households 72% 28% Rich Households 90% 10% SOURCES OF LOANS – URBAN HOUSEHOLDS U E S T I O N S M O D U L E B A S E D -

159. Which of the households is not availing cheap credit? Why? % of Loans - FORMAL Sector % of loans - INFORMAL sector Poor Households 15% 85% Households with few assets 47% 53% Well off Households 72% 28% Rich Households 90% 10% SOURCES OF LOANS – URBAN HOUSEHOLDS U E S T I O N S M O D U L E B A S E D -

160. MONEY AND CREDIT Formal & Informal Credit (Advantages & Disadvantages)

161. FORMAL SECTOR CREDIT IN INDIA Advantages 1. The rate of interest is low. 8% p.a 9% p.a

162. FORMAL SECTOR CREDIT IN INDIA Advantages 2. Formal credit transactions take place under the supervision of Reserve Bank of India.

163. FORMAL SECTOR CREDIT IN INDIA Disadvantages 1. Processing of Credit requests is complex, resulting in long delays. 2. The credit should be repaid in a specified period of time period as mentioned in the agreement. 3. Borrower has to offer a collateral to the lender.

164. FORMAL SECTOR CREDIT IN INDIA Disadvantages 4. Banks are not present everywhere in rural India.

165. FORMAL SECTOR CREDIT IN INDIA Advantages Disadvantages 1. The rate of interest is low. 1. Processing of Credit requests is complex, resulting in long delays. 2. Formal credit transactions take place under the supervision of Reserve Bank of India. 2. The credit should be repaid in a specified period of time period as mentioned in the agreement. 3. Borrower has to offer a collateral to the lender. 4. Banks are not present everywhere in rural India.

166. In the previous section we have seen that poor households are still dependent on informal sources of credit. Why is it so INFORMAL SOURCES OF CREDIT

167. 2. The borrowers can, if necessary, approach the moneylenders even without repaying their earlier loans. INFORMAL SOURCES OF CREDIT Advantages 1. Informal lenders such as moneylenders, know the borrowers personally and hence are often willing to give a loan without collateral.

168. INFORMAL SOURCES OF CREDIT 1. The moneylenders charge very high rates of interest, keep no records of the transactions and harass the poor borrowers. Disadvantages 5% p.m

169. 2. There is no organisation which supervises the credit activities of lenders in the informal sector. 3.They can lend at whatever interest rate they choose. RBI logo Crossed Different interest rate Unfair means 5% per month 5% p.m 6% p.m 7% p.m 5% p.m 8% p.m 6% p.m INFORMAL SOURCES OF CREDIT Disadvantages

170. 4. There is no one to stop them from using unfair means to get their money back. INFORMAL SOURCES OF CREDIT Disadvantages

171. Advantages Disadvantages 1. The credit can be extended on mutual understanding. 1. The rate of interest is high. 2. Borrower may or may not offer a collateral to the lender. 2. There is no organisation which supervises the credit activities of lenders in the informal sector. INFORMAL SOURCES OF CREDIT

172. Formal Credit Informal Credit FORMAL CREDIT Vs INFORMAL CREDIT 1. Money borrowed from formal sources eg. Banks, co-operatives etc. 1. Money borrowed from informal source eg. Money lenders, friends etc. 2. The rate of interest is low. 2. The rate of interest is high. 3. The credit should be repaid in a specified period of time period as mentioned in the agreement. 3. The credit can be extended on mutual understanding. 4. Formal credit transactions take place under the supervision of Reserve Bank of India. 4. Informal credit transactions do not take place under the supervision of Reserve Bank of India. 5. Borrower has to offer a collateral to the lender. 5. Borrower may or may not offer a collateral to the lender.

173. What are the reasons why the banks might not be willing to lend to certain borrowers? U E S T I O N S M O D U L E B A S E D -

174. In India about 80% of farmers are small farmers, who need credit for cultivation. (a) Why might Banks be unwilling to lend to small farmers? (b) What are other sources from which the small farmers can borrow? (c) Explain with an example how the terms of credit can be unfavourable for the small farmer. U E S T I O N S M O D U L E B A S E D -

175. Compare and contrast the role of formal and informal source of credit. U E S T I O N S M O D U L E B A S E D -

176. MONEY AND CREDIT Need for Formal Credit Loans from Cooperatives

177. Compared to the formal lenders, most of the informal lenders charge a much higher interest on loans. Thus, the cost to the borrower of informal loans is much higher. 5% p.m NEED FOR FORMAL CREDIT

178. Higher cost of borrowing means a larger part of the earnings of the borrowers is used to repay the loan. Hence, borrowers have less income left for themselves. NEED FOR FORMAL CREDIT

179. NEED FOR FORMAL CREDIT In certain cases, the high interest rate for borrowing can mean that the amount to be repaid is greater than the income of the borrower. This could lead to increasing debt and debt trap.

180. Also, people who might wish to start an enterprise by borrowing may not do so because of the high cost of borrowing. NEED FOR FORMAL CREDIT

181. Cooperative Societies For these reasons, banks and cooperative societies need to lend more. Cheap and affordable credit is crucial for the country’s development. NEED FOR FORMAL CREDIT

182. Farmers and businessman industry businessman industry & factories increasing India map happy people CHEAP CREDIT - ECONOMIC DEVELOPMENT This would lead to higher incomes and many people could then borrow cheaply for a variety of needs.

183. They could grow crops, do business, set up small-scale industries etc. CHEAP CREDIT - ECONOMIC DEVELOPMENT

184. They could set up new industries or trade in goods. CHEAP CREDIT - ECONOMIC DEVELOPMENT

185. Cheap and affordable credit is crucial for the country’s development. CHEAP CREDIT - ECONOMIC DEVELOPMENT

186. LOANS FROM COOPERATIVES Cooperative Societies Besides banks, the other major source of cheap credit in rural areas are the cooperative societies (or cooperatives). A co-operative society is a voluntary association, where individuals belonging to the same class join their hands for the promotion of their common goals. Members of a cooperative pool their resources for cooperation in certain areas. Farmers Weavers Industrial Workers There are several types of cooperatives possible such as farmers cooperatives, weavers cooperatives, industrial workers cooperatives, etc.

187. LOANS FROM COOPERATIVES KRISHAK COOPERATIVE Collateral It has 2300 farmers as members. It accepts deposits from its members. With these deposits as collateral, the Cooperative has obtained a large loan from the bank. These funds are used to provide loans to members. Once these loans are repaid, another round of lending can take place. Krishak Cooperative functions in a village not very far away from Sonpur. Krishak Cooperative provides loans for the purchase of … Agricultural Implements Loans for Cultivation and Agricultural Trade Fishery Loans Loans for Construction of Houses

188. Why is it necessary for the banks and co-operative societies to increase their lending facilities in rural areas? Explain any three reasons. Explain with an example, how credit plays a vital and positive role for development. In the situations with high risks, credit might create further problems for the borrower. Explain. U E S T I O N S M O D U L E B A S E D -

189. Explain the term debt-trap. Why is it more rampant in rural areas? Give two reasons. Manav needs a loan to set up a small business. On what basis will Manav decide whether to take it from the bank or the money lenders? Discuss. What are loan activities of Co-operative Societies? U E S T I O N S M O D U L E B A S E D -

190. MONEY AND CREDIT Self-Help Groups

191. SELF-HELP GROUPS FOR THE POOR In recent years, people have tried out some newer ways of providing loans to the poor. The idea is to organise rural poor, in particular women, into small Self Help Groups (SHGs) and collect their savings. A typical SHG has 15-20 members, usually belonging to one neighbourhood, who meet and save regularly. Saving per member varies from Rs 25 to Rs 100 or more, depending on the ability of the people to save. Members can take small loans from the group itself to meet their needs. The group charges interest on these loans but this is still less than what the moneylender charges. After a year or two, 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 for the members. Collateral For instance, small loans are provided to the members for : Releasing mortgaged land For meeting working capital needs Seeds Fertilisers Bamboo For housing materials For acquiring assets like Sewing machine Cattle Handlooms

192. SELF-HELP GROUPS FOR THE POOR Most of the important decisions regarding the savings and loan activities are taken by the group members. The group decides as regards the loans to be granted — the purpose, amount, interest to be charged, repayment schedule etc. Also, it is the group which is responsible for the repayment of the loan. Any case of non-repayment of loan by any one member is followed up seriously by other members in the group. Because of this feature, banks are willing to lend to the poor women when organised in SHGs, even though they have no collateral as such.

193. The SHGs help borrowers overcome the problem of lack of collateral. They can get timely loans for a variety of purposes and at a reasonable interest rate. Moreover, SHGs are the building blocks of organisation of the rural poor. SELF-HELP GROUPS FOR THE POOR Importance SHG’s get a loan at interest rate of 7 % p.a from public sector banks.

194. SELF-HELP GROUPS FOR THE POOR Importance SHGs prevent the poor from the harassment of money lenders. SHGs help poor with proper credit facilities. SHGs help women to become self-reliant & help in entrepreneurial development of women. Provides a platform to discuss and act on a variety of social issues such as health, nutrition, domestic violence, etc. Builds team-work, leadership and helps each member to be responsible for each other.

195. SELF-HELP GROUPS FOR THE POOR It is estimated that there are 2.2 million SHGs in India, representing 33 million members, that have taken loans from banks. 

196. SELF-HELP GROUPS FOR THE POOR MAVIM Mahila Arthik Vikas Mahamandal (MAVIM) is the State Women’s Development Corporation of Government of Maharashtra, established on the 24th February, 1975 on the occasion of International Women’s Year.

197. SELF-HELP GROUPS FOR THE POOR MAVIM MAVIM has its presence in 34 Districts of Maharashtra.

198. Describe four features of Self - Help Groups (SHGs.) What is the basic idea behind the SHGs for the poor ? Explain. U E S T I O N S M O D U L E B A S E D -

199. MONEY AND CREDIT Grameen Bank of Bangladesh Conclusion

200. GRAMEEN BANK OF BANGLADESH “If credit can be made available to the poor people Professor Muhammad Yunus, The Founder of Grameen Bank, and recipient of 2006 Nobel Prize for Peace on terms and conditions that are appropriate and reasonable these millions of small people with their millions of small pursuits can add up to create the biggest development wonder.” Bank symbol comes with name

201. Grameen Bank of Bangladesh is one of the biggest success stories in reaching the poor to meet their credit needs at reasonable rates. Started in the 1970s as a small project, Grameen Bank in October 2014 has over 8.63 million members in about 81,390 villages spread across Bangladesh. Almost all of the borrowers are women and belong to poorest sections of the society. These borrowers have proved that not only are poor women reliable borrowers, but that they can start and run a variety of small income-generating activities successfully. GRAMEEN BANK OF BANGLADESH

202. It is essential that the total formal sector credit increases so that the dependence on the more expensive informal credit becomes less. Also, the poor should get a much greater share of formal loans. Cheap Credit For All is important for development. CONCLUSION Formal Credit Informal Credit ✔ 🗶

203. Write a short note on Grameen Bank of Bangladesh? U E S T I O N S M O D U L E B A S E D -

204. THE ECONOMIC TIMES 19 Feb 2017 Pg 24 ET

205. 19 Feb 2017 Pg 24 ET

206. THE ECONOMIC TIMES 21 Feb 2017 Pg 15 ET

207. THE ECONOMIC TIMES 30 August 2016

208. THE ECONOMIC TIMES 3 August 2016

209. THE ECONOMIC TIMES 3 August 2016

210. THE ECONOMIC TIMES 9 December Pg 15