Class 10 Economics
Chapter 3- Money and Credit
Notes
The evolution of currency
traces back to ancient Indian barter practices involving grains and cattle.
Metal coins emerged as standardized mediums, later replaced by currency notes
and coins issued by the Reserve Bank of India. Banking institutions manage
currency circulation, extending loans to individuals and businesses,
contributing to economic growth.
- Evolution of Currency:
- In ancient times, Indians engaged in
barter using grains and cattle, representing the earliest forms of trade.
- Metal coins, including those made of
copper, gold, and silver, emerged later as standardized mediums of
exchange.
- Presently, currency notes and coins
issued by the Reserve Bank of India (RBI) serve as legal tender,
facilitating transactions across various sectors of the economy.
- Banking institutions play a pivotal role
in managing currency circulation and providing essential financial
services, including deposits, withdrawals, and loans.
- Banking Loan Operations:
- Banks are fundamental financial
institutions in India, serving as custodians of approximately 15% of the
country's deposits held in cash reserves.
- These cash reserves act as liquidity
buffers, ensuring that banks can meet withdrawal demands from depositors.
- A significant portion of the cash
reserves received by banks is extended as loans to individuals and
businesses for various economic activities.
- Banks earn revenue through interest
charged on loans, which contributes to their profitability and sustains
their operations.
- Diverse Credit Scenarios:
- Credit scenarios vary based on
borrowers' ability to fulfill repayment obligations.
- In favorable credit situations,
borrowers commit to repaying loans upon achieving income targets, ensuring
timely repayment.
- However, during financial crises or
economic downturns, borrowers may face challenges in meeting loan
repayment deadlines, leading to strained credit situations and potential
defaults.
- Credit Terms and Conditions:
- Moneylenders typically require
collateral, such as real estate or vehicles, as security against loans
disbursed.
- Loan agreements include terms such as
interest rates, documentation requirements, collateral valuation methods,
and repayment schedules.
- Collateral serves as a guarantee for
lenders, allowing them to recover the loan amount by selling the pledged
asset in case of borrower default.
- Formal Credit Sector in India:
- Regulated by the Reserve Bank of India
(RBI), the formal credit sector includes commercial banks, cooperative
banks, and other financial institutions.
- These institutions adhere to RBI
guidelines and regulations, ensuring transparency and accountability in lending
practices.
- Formal credit activities are regularly
monitored and reported to the RBI, contributing to the overall stability
and integrity of the financial system.
- Informal Credit Practices:
- Informal credit sources, such as
friends, family, employers, and local moneylenders, operate outside the
purview of regulatory oversight.
- Borrowers often resort to informal
credit channels due to accessibility and flexibility but may face
challenges such as higher interest rates and lack of legal protection.
- Monitoring informal credit practices
poses significant challenges, as these transactions occur informally and
are not subject to regulatory scrutiny.
- Benefits of Self-Help Groups (SHGs):
- SHGs facilitate regular meetings where
members discuss various topics, including financial literacy, health, and
domestic issues.
- These groups empower women by providing
access to financial resources and opportunities for skill development and
income generation.
- SHGs offer loans to members at fair
interest rates, enabling them to invest in livelihood activities and
become economically self-sufficient.
- They serve as platforms for collective
decision-making and mutual support, fostering community cohesion and
resilience.
8. What is a barter system?
The barter system is an
ancient method of exchanging goods and services without using money as a medium
of exchange. In a barter system, individuals or communities directly trade
their goods or services for other goods or services they need. This system
predates the invention of money and was commonly practiced in early human
societies and among ancient civilizations.
While the barter system
facilitated transactions before the advent of currency, it had limitations such
as the need for a double coincidence of wants, lack of a standard measure of
value, and difficulties in conducting complex transactions. Despite its
drawbacks, the barter system played a crucial role in early economic exchanges
and contributed to the development of trade and commerce.
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