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Chapter 3. Money and Credit

Chapter 3. Money and Credit

Money plays an important role in our daily lives by making the exchange of goods and services easier. Modern banking systems provide various financial services such as saving, borrowing, lending, and transferring money. This chapter explains the functions of money, the role of banks, credit, and the importance of formal financial institutions in economic development.

CBSE Notes – Key Points

This section provides important concepts, keywords, facts, and exam-oriented points for quick revision.

Important Terms

• Money
• Medium of Exchange
• Double Coincidence of Wants
• Barter System
• Credit
• Loan
• Collateral
• Interest
• Debt
• Formal Sector Credit
• Informal Sector Credit
• Reserve Bank of India (RBI)
• Bank Deposit
• Cheque
• Demand Deposit

Important Facts

• Money acts as a medium of exchange.
• The barter system suffered from the problem of double coincidence of wants.
• Banks accept deposits and provide loans.
• Demand deposits can be withdrawn whenever required.
• The Reserve Bank of India regulates the banking system.
• Formal credit is safer and cheaper than informal credit.
• Credit helps increase production, income, and employment.

Important Concepts

• Barter System
• Functions of Money
• Modern Forms of Money
• Bank Deposits
• Credit
• Terms of Credit
• Formal and Informal Sources of Credit
• Role of RBI
• Self-Help Groups (SHGs)

Exam Important Points

• Meaning and functions of money.
• Problems of the barter system.
• Demand deposits and their features.
• Functions of commercial banks.
• Terms of credit.
• Difference between formal and informal sources of credit.
• Role of the Reserve Bank of India (RBI).
• Importance of Self-Help Groups (SHGs).

Quick Revision

• Money eliminates the problem of double coincidence of wants.
• Demand deposits are payable on demand.
• Banks accept deposits and provide loans.
• Collateral is an asset kept as security against a loan.
• RBI is the central bank of India.
• Formal credit includes banks and cooperative societies.
• Informal credit includes moneylenders, traders, friends, and relatives.
• Self-Help Groups improve access to credit in rural areas.

Exam Tips

• Understand the difference between the Barter System and Money.
• Learn the functions of money with examples.
• Remember the features of demand deposits.
• Study the role of banks and RBI carefully.
• Revise the differences between formal and informal credit.
• Prepare the advantages of Self-Help Groups (SHGs).

Chapter 3. Money and Credit

Chapter 3. Money and Credit

In ancient times, people exchanged goods through the barter system. However, this system created several difficulties because both parties had to agree to exchange the goods they possessed. To overcome these problems, money was introduced as a medium of exchange. Today, money has become an essential part of every economic activity.

Part 1 – Money and Its Functions

This section explains the barter system, the need for money, functions of money, and the different forms of modern money.

Barter System

The barter system is a method of exchanging goods and services without using money.

• Goods were exchanged directly for other goods.
• It was the earliest form of trade.
• No money was used in transactions.
• The value of goods had to be mutually accepted.
• The barter system became difficult as trade expanded.

Problems of the Barter System

The barter system had several limitations that made trade difficult.

• It required a double coincidence of wants.
• There was no common measure of value.
• Many goods could not be divided easily.
• Saving wealth was difficult.
• Large-scale trade was not possible.

Double Coincidence of Wants

Double coincidence of wants means that two persons must be willing to exchange the goods each possesses for the goods the other wants.

• Both parties must need each other's goods.
• Trade cannot take place without mutual agreement.
• Finding suitable exchange partners is difficult.
• It makes transactions slow and inconvenient.
• Money eliminates this problem.

Meaning of Money

Money is anything that is generally accepted as a medium of exchange for buying and selling goods and services.

• It is accepted by everyone.
• It simplifies buying and selling.
• It makes transactions faster.
• It removes the limitations of barter.
• It promotes trade and economic development.

Functions of Money

Money performs several important functions in an economy.

• It acts as a medium of exchange.
• It serves as a measure of value.
• It acts as a store of value.
• It helps in deferred payments.
• It facilitates domestic and international trade.

Modern Forms of Money

Today, money exists in different forms that are accepted for making payments.

• Currency notes issued by the Reserve Bank of India.
• Coins issued by the Government of India.
• Bank deposits.
• Cheques.
• Digital payment systems such as UPI, debit cards, and net banking.

Demand Deposits

Money deposited in a bank that can be withdrawn at any time is called a demand deposit.

• Depositors can withdraw money whenever required.
• Demand deposits are accepted as money.
• Payments can be made through cheques.
• They provide safety for savings.
• They promote cashless transactions.

Importance of Money

Money has made economic activities easier and more efficient.

• It encourages trade and commerce.
• It saves time and effort.
• It supports economic growth.
• It increases market efficiency.
• It improves the standard of living.

CBSE Exam Points

• The barter system required double coincidence of wants.
• Money acts as a medium of exchange.
• Demand deposits are payable on demand.
• Currency notes and bank deposits are modern forms of money.
• Money removes the limitations of the barter system.

Chapter 3. Money and Credit

Chapter 3. Money and Credit

Banks play an important role in the modern economy by accepting deposits from people and providing loans to individuals and businesses. Credit helps increase production, income, and employment. However, the benefits of credit depend on its proper use and the terms on which it is provided.

Part 2 – Banks and Credit

This section explains the functions of banks, bank deposits, lending activities, credit, and the important terms related to loans.

Role of Banks

Banks act as financial institutions that mobilise savings and provide loans for various economic activities.

• Banks accept deposits from the public.
• They provide loans to individuals and businesses.
• They promote saving habits.
• They facilitate payments and money transfers.
• They contribute to economic development.

Bank Deposits

People deposit their surplus money in banks to keep it safe and earn interest.

• Deposits are secure and easily accessible.
• Banks pay interest on deposits.
• Demand deposits can be withdrawn at any time.
• Deposits help banks provide loans.
• Depositors can make payments through cheques and digital banking.

How Banks Provide Loans

Banks use a major portion of deposited money to provide loans to borrowers.

• Only a small portion of deposits is kept as cash reserves.
• The remaining amount is used for lending.
• Loans are provided to farmers, traders, industries, and households.
• Borrowers repay the loan with interest.
• Lending is one of the main sources of bank income.

Meaning of Credit

Credit is an agreement in which a lender provides money or goods to a borrower with the promise of repayment in the future.

• Credit helps people meet financial needs.
• It supports business and production activities.
• It increases investment and employment.
• Credit may be beneficial or harmful depending on its use.
• Proper use of credit promotes economic development.

Terms of Credit

The conditions on which a loan is provided are known as the terms of credit.

• Rate of interest.
• Collateral or security.
• Loan repayment period.
• Mode of repayment.
• Required documents and conditions.

Collateral

Collateral is an asset pledged as security against a loan.

• It reduces the risk for lenders.
• Land, buildings, jewellery, and fixed deposits may be used as collateral.
• If the borrower fails to repay the loan, the lender can claim the collateral.
• Collateral is generally required for large loans.
• Small loans may sometimes be given without collateral.

Importance of Credit

Credit plays a significant role in economic development when used productively.

• It helps farmers purchase seeds and fertilisers.
• It enables industries to expand production.
• It supports self-employment and entrepreneurship.
• It creates employment opportunities.
• It contributes to national income and economic growth.

When Credit Becomes a Burden

Credit can create financial problems if loans are not used properly or cannot be repaid.

• Crop failure may make it difficult for farmers to repay loans.
• Business losses may increase debt.
• High interest rates increase the repayment burden.
• Failure to repay loans may lead to financial distress.
• Borrowers should use credit carefully and responsibly.

CBSE Exam Points

• Banks accept deposits and provide loans.
• Credit is an agreement between the lender and the borrower.
• Collateral is a security kept against a loan.
• The terms of credit include interest rate, collateral, repayment period, and mode of repayment.
• Productive use of credit promotes economic development.

Chapter 3. Money and Credit

Chapter 3. Money and Credit

Credit is available from both formal and informal sources. Formal financial institutions provide loans under government regulations, whereas informal lenders operate without strict rules. The Reserve Bank of India (RBI) regulates the banking system and ensures the smooth functioning of financial institutions. Self-Help Groups (SHGs) also play an important role in providing credit, especially in rural areas.

Part 3 – Formal and Informal Credit, RBI and Self-Help Groups

This section explains the different sources of credit, the role of the Reserve Bank of India, and the importance of Self-Help Groups (SHGs) in promoting financial inclusion.

Formal Sources of Credit

Formal sources of credit are financial institutions that operate under the rules and regulations of the government and the Reserve Bank of India.

• Commercial banks provide loans at reasonable interest rates.
• Cooperative banks support farmers and small businesses.
• Formal institutions follow legal procedures.
• Borrowers receive better protection and transparency.
• Formal credit promotes economic development.

Examples: Commercial Banks, Cooperative Banks and Regional Rural Banks.

Informal Sources of Credit

Informal sources provide loans without following government regulations.

• Interest rates are generally very high.
• Borrowers often face exploitation.
• Loans are provided with fewer formalities.
• Repayment conditions may be unfair.
• These sources are commonly used in rural areas where banking facilities are limited.

Examples: Moneylenders, Traders, Employers, Friends and Relatives.

Difference between Formal and Informal Credit

• Formal credit is regulated by the RBI, whereas informal credit is not.
• Formal institutions generally charge lower interest rates.
• Informal lenders often charge very high interest.
• Formal credit provides greater security and transparency.
• Informal credit may lead borrowers into a debt trap.

Role of the Reserve Bank of India (RBI)

The Reserve Bank of India is the central bank of the country and regulates the banking system.

• It issues currency notes in India.
• It supervises commercial banks.
• It regulates the supply of money in the economy.
• It ensures that banks follow government policies.
• It promotes financial stability and public confidence.

Self-Help Groups (SHGs)

Self-Help Groups are small groups of people, mainly women, who save money regularly and provide loans to their members.

• Members contribute small savings every month.
• Loans are provided from the group's savings.
• SHGs reduce dependence on moneylenders.
• They encourage self-employment and entrepreneurship.
• They improve the financial condition of rural households.

Importance of Self-Help Groups

Self-Help Groups have become an important source of credit for poor families.

• They provide easy access to loans.
• Interest rates are generally lower than those charged by moneylenders.
• They promote women empowerment.
• They encourage regular saving habits.
• They strengthen rural development and financial inclusion.

Need for Formal Credit

Expanding formal credit is essential for inclusive and sustainable economic development.

• It protects borrowers from exploitation.
• It provides affordable loans.
• It supports agriculture, industries, and small businesses.
• It promotes investment and employment.
• It reduces dependence on informal lenders.

Key Learning

A strong banking system and easy access to formal credit are essential for economic growth and financial security.

• Formal credit is safer than informal credit.
• The RBI regulates the banking system.
• Self-Help Groups improve access to finance in rural areas.
• Responsible borrowing supports economic development.
• Financial inclusion contributes to inclusive growth.

CBSE Exam Points

• Formal credit is regulated by the Reserve Bank of India.
• Commercial banks are the major source of formal credit.
• Moneylenders are an important source of informal credit.
• Self-Help Groups provide small loans, especially to rural women.
• Expanding formal credit helps reduce exploitation and supports economic development.

Chapter 3. Money and Credit

Assignments for Preparation

Practice the following questions carefully to strengthen your understanding of the chapter and prepare effectively for the CBSE Board Examination.

Multiple Choice Questions (MCQs)

1. The barter system is based on:

(a) Money
(b) Direct exchange of goods and services
(c) Banking system
(d) Credit

2. The main problem of the barter system is:

(a) Inflation
(b) Double coincidence of wants
(c) High interest rate
(d) Unemployment

3. Money mainly acts as a:

(a) Medium of Exchange
(b) Natural Resource
(c) Factor of Production
(d) Tax

4. Which is a modern form of money?

(a) Wheat
(b) Currency Notes
(c) Gold only
(d) Barter Goods

5. Demand deposits are kept in:

(a) Factories
(b) Banks
(c) Schools
(d) Markets

6. Demand deposits can be withdrawn:

(a) Only after one year
(b) Only with government permission
(c) Whenever required
(d) Only after maturity

7. Banks mainly earn income by:

(a) Collecting taxes
(b) Giving loans
(c) Selling goods
(d) Printing currency

8. Credit means:

(a) Donation
(b) Borrowing and lending of money
(c) Saving money only
(d) Payment of taxes

9. Which of the following is a term of credit?

(a) Interest Rate
(b) Rainfall
(c) Population
(d) Literacy Rate

10. Collateral means:

(a) Salary
(b) Security against a loan
(c) Tax Payment
(d) Deposit Slip

11. Which is a formal source of credit?

(a) Moneylender
(b) Friend
(c) Commercial Bank
(d) Trader

12. Which is an informal source of credit?

(a) Cooperative Bank
(b) Commercial Bank
(c) Moneylender
(d) Regional Rural Bank

13. The Reserve Bank of India is the:

(a) Commercial Bank
(b) Central Bank of India
(c) Foreign Bank
(d) Cooperative Bank

14. RBI regulates:

(a) Schools
(b) Industries only
(c) Banking System
(d) Agriculture

15. Which of the following generally charges the highest rate of interest?

(a) Commercial Bank
(b) Cooperative Bank
(c) Moneylender
(d) Regional Rural Bank

16. Self-Help Groups (SHGs) mainly consist of:

(a) Large Industries
(b) Government Officers
(c) Small Groups of People, mainly Women
(d) Exporters

17. Self-Help Groups encourage:

(a) Saving Habits
(b) Tax Collection
(c) Foreign Trade
(d) Imports

18. Formal credit is better because:

(a) It charges very high interest
(b) It follows RBI rules and regulations
(c) It is illegal
(d) It does not require repayment

19. Credit helps in:

(a) Increasing production and employment
(b) Reducing production
(c) Increasing pollution only
(d) Stopping business activities

20. Expanding formal credit is important because it:

(a) Increases exploitation
(b) Reduces dependence on moneylenders
(c) Stops banking services
(d) Reduces savings

Short Answer Questions (2–3 Marks)

1. What is the barter system? State any two limitations.

2. Explain the meaning of double coincidence of wants.

3. State any three functions of money.

4. What are demand deposits? Why are they considered money?

5. Explain how banks use the money deposited by people.

6. What is meant by collateral? Why is it required?

7. Differentiate between formal and informal sources of credit.

8. Explain any three advantages of Self-Help Groups (SHGs).

Long Answer Questions (5 Marks)

1. Explain the problems of the barter system. How does money solve these problems?

2. Describe the functions of commercial banks in the modern economy.

3. Explain the meaning of credit. Discuss how credit can be both useful and harmful.

4. Differentiate between formal and informal sources of credit with suitable examples.

5. Explain the role of the Reserve Bank of India (RBI) in regulating the banking system.

6. Describe the importance of Self-Help Groups (SHGs) in improving rural credit and financial inclusion.

CBSE Competency-Based Questions

1. A farmer borrows money from a moneylender at a very high rate of interest and fails to repay the loan due to crop failure. Identify the type of credit source and explain one problem faced by the farmer.

2. A shopkeeper deposits his daily earnings in a bank and later uses a cheque to make payments to a supplier. Explain how the banking system helps the shopkeeper.

3. Why is formal credit considered safer and more reliable than informal credit? Give suitable reasons.

4. A group of rural women starts saving ₹100 every month and later provides small loans to its members. Identify the organisation and explain its importance.

5. "Easy access to affordable credit is essential for economic development." Justify the statement with suitable examples.