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.
Definitions [7]
Definition: Double Coincidence of Wants
Double coincidence of wants is a situation in a barter system where two people must each want what the other has in order for an exchange to take place.
Definition: Demand Deposits
Since deposits in the bank accounts can be withdrawn on demand, these deposits are called demand deposits.
Definition: Cheque
A cheque 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 issued.
Definition: Credit
Credit (loan) refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payment.
Definition: Collateral
Collateral is an asset that the borrower owns (such as land, building, vehicle, livestock, deposits with banks) and uses this as a guarantee to a lender until the loan is repaid.
Definition: Terms of Credit
Interest rate, collateral and documentation requirements, and the mode of repayment together comprise what is called the terms of credit.
Definition: Medium of Exchange
Key Points
Key Points: Modern Form of Money
- Coins: Metallic token money whose face value is higher than intrinsic value (e.g., ₹1, ₹2, ₹5 coins).
- Currency Notes: Paper money issued by RBI; inconvertible and legal tender for unlimited amounts.
- Deposit (Bank) Money: Bank deposits operated through cheques; widely used for large and safe transactions.
- Credit Cards: Not money supply; allow purchase on credit, with payments ultimately settled in money.
Key Points: Money as a Medium of Exchange
- 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.
Key Points: Two Different Credit Situations
- 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.
Key Points: Self-Help Groups for the Poor
- Poor households find it difficult to get bank loans because they lack collateral and documents.
- As a result, they depend on moneylenders who charge very high interest rates.
- Self-Help Groups (SHGs) are small groups where members save money regularly.
- SHGs provide small loans to their members at reasonable interest rates.
- Banks give loans to SHGs without collateral due to group responsibility.
- SHGs help members become financially independent and socially aware.
- Grameen Bank provides small loans mainly to poor women and supports income generation.
Key Points: Terms of Credit
- 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.
Key Points: Formal Sector Credit in India
- 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.
Key Points: Loan Activities of Banks
- 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.
Important Questions [14]
- ''The use of money spans a very large part of our everyday life." Support the statement with example.
- How do double coincidence of wants arise?
- Read the following situation regarding credit and identify the positive impact of credit. Salim obtains credit to meet the working capital needs of production.
- Explain any three terms of Credit.
- A House Loan Megha has taken a loan of 75 lakhs from the bank to purchase a house. The annual interest rate on the loan is 12 percent and the loan is to be repaid in 10 years in monthly instalments.
- Assertion (A): Banks are not ready to lend money to certain borrowers. Reason (R): Some people do not have collateral.
- Explain, why the banks do not lend credit to certain borrowers.
- Read the given source and answer the questions that follow: Loans from Cooperatives Besides banks, the other major source of cheap credit in rural areas are th
- "Cheap and affordable credit is crucial for the country's development." Assess the statement.
- Distinguish between formal and informal sources of credit.
- Justify the role of 'self Help Groups' in the rural economy.
- How to create more employment in rural areas? Explain with examples.
- Who among the following takes the decision regarding saving and loan activities in the Self Help Groups (SHGs)?
- Explain the functions of "Self Help Group".
