Overview of Money and Credit

A medium of exchange is anything that is widely accepted in exchange for goods and services and is used to facilitate buying and selling in an economy.

• Money is used in daily life to buy and sell goods and services.
• In a barter system, exchange requires a double coincidence of wants, which is difficult.
• Money removes the need for a double coincidence of wants.
• A person can sell goods for money and later buy what they need.
• Because money helps in exchange, it is called a medium of exchange.

• Banks accept deposits from the public and keep only a small part as cash reserves.
• The major portion of deposits is used to give loans to people who need money.
• Banks act as a mediator between depositors and borrowers.
• Borrowers pay interest on loans, while depositors receive interest on deposits.
• The difference between loan interest and deposit interest is the main income of banks.

• Credit means borrowing money, goods, or services with a promise to repay in the future.
• In Salim’s case, credit helped him meet production costs, complete orders on time, and earn a profit.
• In Swapna’s case, crop failure made it difficult to repay the loan, pushing her into a debt trap.
• Credit can be useful when income is stable and risks are low.
• Credit can be harmful when income fails, as repayment becomes difficult and losses increase.

• Terms of credit include the interest rate, duration of loan, collateral, documents required, and mode of repayment.
• Collateral is an asset owned by the borrower that is kept as security against the loan.
• If the borrower fails to repay, the lender can sell the collateral to recover the money.
• Different credit arrangements exist in villages, such as loans from moneylenders, traders, landlords, banks, and cooperatives.
• Interest rates vary widely, with moneylenders usually charging higher interest than banks and cooperatives.
• Poor and landless workers often depend on moneylenders or employers for credit because they lack collateral.
• Cooperative societies and banks provide relatively cheaper and safer loans, especially for farmers and rural people.

• Credit sources in India are divided into formal (banks, cooperatives) and informal (moneylenders, traders, landlords, relatives).
• Formal sector credit is regulated by the Reserve Bank of India (RBI), which sets rules and monitors lending.
• Informal lenders are not regulated, so they can charge very high interest rates.
• Poor households depend more on informal credit, while rich households get most loans from formal sources.
• High interest from informal credit often leads to debt traps for poor borrowers.
• Formal loans are usually cheaper and safer, but are not equally available to everyone.
• Expanding formal sector credit is necessary to reduce dependence on informal lenders and support development.