Class 10 Economics Chapter 3- Money and Credit Notes

 

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.

 

1. 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.

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.