🔹 Money can be defined as anything that act as medium of exchange, store of value and unit of accounting to facilitate the economic activities and transactions. E.g. Currency - paper notes and coins, Demand Deposits, Bankers Cheque.
❇️ Barter system and the need of money :-
🔹 In barter system goods are directly exchanged with goods to complete the mutual needs.
🔹 E.g. Shoemaker exchanges a pair of manufactured shoes to the farmer for some quantity of wheat. This system has several drawbacks.
1. Double coincidence of wants is essential
2. Store of Value
3. Deferred Payments
4. Unit of Accounting
❇️ Inconvenience of Barter Exchange :-
🔹(a) Lack of double coincidence of wants.
🔹 (b) Absence of common measure of values.
🔹 (c) Lack of divisibility.
🔹 (d) Difficulty in storing wealth.
🔹 (e) Lack of satisfactory unit to engage in contracts.
❇️ Forms of Money :-
✴️ Ancient period :- Grain and cattle were used as money.
✴️ Medieval period :- Metallic coins of gold, silver, copper and lead were used as money.
✴️ Modern period :- Paper currency and coins are used as money.
❇️ MONEY AS A MEDIUM OF EXCHANGE :-
🔹 A person holding money can exchange it for any commodity or service that he or she might want.
🔹 Thus everyone prefers to receive payments in money and then exchange the money for things that they want.
🔹 Both parties have to agree to sell and buy each other commodities. This is known as a Double coincidence of wants.
🔹 What a person desires to sell is exactly what the other wishes to buy.
🔹 In a barter system where goods are directly exchanged without the use of: money, the double coincidence of wants is an essential feature.
🔹 In contrast, in an economy where money is in use, money by providing the crucial intermediate step eliminates the need for double coincidence of wants.
🔹 Money acts as an intermediate in the exchange process, it is called a medium of exchange. This is known as Barter System.
❇️ MODERN FORMS OF MONEY :-
🔹 We have seen that money is something that can act as a medium of exchange in transactions.
🔹 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.
❇️ Money as a legal tender :-
🔹 Currency (coins and notes) is a legal tender money which cannot be refused in payment for transaction. Everybody is bound to accept it in exchange for goods and services and in discharge of debts. None can refuse to accept it because non - acceptance is an offence. It is issued by the government or duly authorized central bank.
❇️ Demand Deposits :-
🔹 Deposits in a bank which are payable on demand are called demand deposits. It also provide the facility of medium of exchange which is a function of money, when payments are made by cheques.
❇️ Cheque :-
🔹 It 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 made.
❇️ Loan activities of the bank :-
🔹Bank mediates between those who has surplus amount and those who need money.
🔹 Bank accepts deposits from the bank account holders who have excess amount.
🔹 Bank stores small portion of this amount as a provision for users who wish to withdraw money.
🔹 Currently in India this is around 15% of the total amount. The major portion of the money is offered as a loan to those who need money.
🔹 Loan is an amount given by bank in which bank provide money to the needy with an assurance to pay the amount with the extra amount charged as an interest.
🔹 A person who deposits the amount in the bank account called as depositor. A who borrows money from the bank is called a borrower.
🔹 person The rate of interest on loan is higher than the rate of interest banks offer on the deposits.
🔹 The difference between the amounts earned from borrowers to the amount given to depositor is the main source of income for any bank.
❇️ Credit :-
🔹 Credit is an agreement in which lender supplies the borrower with the money, goods or services in return for the promise of future payments.
🔹 E.g. Shoe manufacturer receives an order or 3000 pair of shoes to be delivered in a month. To complete the order he needs resources such as workers, raw material. He asks raw material supplier to supply raw material now and promises to pay him later. He then obtains loan in cash as an advanced payment from the person who gave the order. This way he have solved his present working capital needs. At the end of the month he is able to complete the order and earn money.
🔹 In the second scenario a farmer took loan from a moneylender to meet expense of crop cultivation. Due to bad weather crop fails. The farmer is not able to repay the loan. Over year the loan grows to a large amount. This situation is called debt trap. The farmer is now caught in the debt trap and to pay off the debt farmer has to sell some of his land. In this case the credit creates negative impact on the business.
❇️ Terms of Credit :-
🔹 While giving the loan the lender has to check for security of future payment for that he signs an agreement with the borrower which specifies terms of credit.
🔹 An Agreement consists of interest rate, collateral security, documentation and mode of repayment. These are called as terms of credit. In case if the borrower fails to repay the loan, the lender has right to obtain his amount by selling the collateral.
🔹 Terms of credit may vary from one credit arrangement to another. They may vary depending on the nature of the lender and borrower.
❇️ Sources of Credit :-
🔹 Moneylender and local traders
🔹 Banks
🔹 Cooperatives
🔹 Other sources like relatives, friends etc.
❇️ Debt Trap :-
🔹 It is a situation in which a person is caught in the vicious cycle of debts.
🔹 He/she takes loans for meeting his/her requirements and on being unable to pay back the loan, takes a fresh loan to repay the old loan.
🔹 This leaves him/her indebted all through his/her life.
❇️ Collateral :-
🔹 it is an asset owned by the borrower such as land, building, vehicle, livestock etc., which is kept with the bank as a guarantee against a loan until the loan is repaid.
🔹 In case of failure in repaying the loan, the bank would have the right to sell the collateral to recover the loan amount.
❇️ Formal sector credit in India :-
🔹 It includes loans from banks and cooperatives. RBI supervises their functions of giving loans. Rich urban household depends largely on formal source of credits. Lower rate of interest on loans is charged as compared to informal sources of credits.
❇️ Informal sector credit in India :-
🔹 It includes traders, employers, moneylenders, relatives, and friends etc. no organization is there to supervise its lending activities. Higher interest on loans is charged as compared to formal sources of credit. Poor household largely depends on informal source of credits.
❇️ Self-help groups (SHG) for the poor :-
🔹 It helps in pooling the savings of the members, who are poor women. Members can get timely loans for a variety of purposes and at reasonable rate of interest. It helps borrowers to overcome the problem of lack of collateral. It also provides a platform to discuss sanit variety of social issues of their concern.
❇️ Chit Fund :-
🔹 Chit means a transaction under which a person enters into an agreement with a specified number of persons that every one of them shall subscribe a certain amount of money by way of periodic instalment over a definite period. Reasonable rate of interest is charged against the loan taken by subscriber members.
