Class 10 Social Science Notes Chapter 3 (Money and credit) – Understanding Econimic Development Book

Detailed Notes with MCQs of Chapter 3, 'Money and Credit,' from your Economics textbook. This is a crucial chapter, not just for your board exams, but also because concepts related to money, banking, and credit frequently appear in various government exams. Pay close attention to the key terms and the functioning of institutions.

Chapter 3: Money and Credit - Detailed Notes for Government Exam Preparation

1. Money as a Medium of Exchange:

• Barter System: The direct exchange of goods for goods without the use of money.
  • Limitation: Requires a Double Coincidence of Wants – both parties must agree to sell and buy each other's commodities. This is often difficult and time-consuming.
• Money: Anything that is generally accepted as a medium of exchange to facilitate transactions and overcome the limitations of barter.
  • Key Function: Acts as an intermediate step, eliminating the need for double coincidence of wants. It allows purchase and sale to be separate acts.
  • Other functions (though less emphasized in this chapter): Store of value, Unit of account.

2. Modern Forms of Money:

• Currency: Includes paper notes and coins.
  • Why Accepted? It is authorized by the government of the country (Legal Tender). No individual can legally refuse a payment made in the national currency.
  • In India, the Reserve Bank of India (RBI) issues currency notes on behalf of the central government.
• Deposits with Banks (Demand Deposits): Money deposited by people in bank accounts.
  • Demand Deposits: Deposits that can be withdrawn by the depositor on demand (e.g., through withdrawal slips or cheques).
  • How they act as Money: They are widely accepted as a means of payment via cheques. 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.
  • This offers convenience and safety compared to carrying large amounts of cash.

3. Loan Activities of Banks:

• Basic Mechanism: Banks act as intermediaries between those who have surplus funds (depositors) and those who need funds (borrowers).
• Process:
  1. Banks accept deposits from the public.
  2. Banks keep a small proportion of these deposits as cash for daily withdrawals (e.g., around 15% in India – this is related to the Cash Reserve Ratio (CRR), though the exact term isn't stressed here). This is based on the assumption that only a fraction of depositors will withdraw money on any given day.
  3. The major portion of the deposits is used to extend loans (credit) to borrowers for various economic activities.
• Bank Income: Banks charge a higher interest rate on loans than what they offer on deposits. The difference between these two rates (Interest Rate Spread) is the main source of income for banks.

4. Two Different Credit Situations:

• Credit (Loan): An agreement where the lender supplies the borrower with money, goods, or services in return for the promise of future payment.
• Credit can be beneficial:
  • Example: A manufacturer taking a loan for working capital during the festival season, completing production on time, making a profit, and repaying the loan. Here, credit helps increase earnings.
• Credit can lead to a Debt Trap:
  • Example: A farmer (like Swapna in the book) taking a loan for cultivation, but the crop fails due to pests or lack of rain. They are unable to repay the loan and may have to take another loan for the next season or sell assets, pushing them into a situation where recovery is very difficult.
  • Debt Trap: A situation where repaying a debt becomes impossible, often leading to taking on more debt to repay existing ones. This is particularly risky in situations with high uncertainty (like agriculture dependent on monsoon).

5. Terms of Credit:

• These are the conditions under which a loan is given. They vary significantly.
• Key Components:
  • Interest Rate: The percentage charged by the lender on the principal amount.
  • Collateral: An asset (like land, building, vehicle, livestock, bank deposits) that the borrower owns and pledges to the lender as a guarantee until the loan is repaid. If the borrower fails to repay, the lender has the right to sell the collateral to recover the loan amount. Lack of collateral is a major reason why the poor struggle to get bank loans.
  • Documentation Requirement: Proof of identity, address, income, employment, etc.
  • Mode of Repayment: The schedule and method of repaying the loan (e.g., monthly instalments over a specific period).

6. Formal Sector Credit in India:

• Sources: Banks (Commercial Banks, Regional Rural Banks) and Cooperatives.
• Supervision: The Reserve Bank of India (RBI) supervises the functioning of formal sources of loans.
  • RBI's Role:
    • Ensures banks maintain a minimum cash balance (related to CRR/SLR).
    • Monitors that banks give loans not just to profit-making businesses and traders but also to small cultivators, small-scale industries, small borrowers, etc.
    • Periodically, banks have to submit information to the RBI on how much they are lending, to whom, and at what interest rate.
• Characteristics: Generally lower interest rates, proper terms and conditions, regulated practices.

7. Informal Sector Credit in India:

• Sources: Moneylenders, traders, employers, relatives, and friends.
• Supervision: There is no organization that supervises the credit activities of lenders in the informal sector.
• Characteristics:
  • Can charge very high interest rates.
  • No fixed rules or regulations.
  • Often use unfair means to get their money back.
  • Can push borrowers into a debt trap.
• Prevalence: A large proportion of poor households (especially in rural areas) still depend on informal sources because:
  • Banks may not be present everywhere.
  • Getting a loan from a bank is often difficult due to collateral and documentation requirements.
  • Informal lenders often know the borrower personally and may lend without collateral, albeit at a higher cost.

8. Importance of Cheap and Affordable Credit:

• Crucial for country's development.
• Allows people to invest in agriculture, business, set up small industries, etc.
• Reduces dependence on informal lenders and prevents debt traps.
• Therefore, it's necessary that banks and cooperatives increase their lending, particularly in rural areas, so that the dependence on informal sources reduces. Formal sector loans need to expand and reach everyone.

9. Self-Help Groups (SHGs) for the Poor:

• Concept: An attempt to organize rural poor (particularly women) into small groups (typically 15-20 members) that pool their savings.
• Functioning:
  • Members save regularly (amount varies based on ability).
  • The group uses these pooled savings to give small loans to members for their needs (e.g., working capital, buying seeds, raw materials, housing materials, releasing mortgaged land).
  • The group decides the terms of credit (interest rate, repayment schedule), usually lower than moneylenders but slightly higher than bank rates (to build the group's corpus).
  • Regular repayment is crucial. Non-repayment is taken seriously by group members.
• Addressing Collateral: SHGs help members overcome the problem of lack of collateral. Banks are willing to lend to mature SHGs (regular in savings) based on the group's track record, without demanding collateral from individual members. The group as a whole is responsible for repayment.
• Other Benefits:
  • Building blocks of organisation for the rural poor.
  • Empowerment of women (financial independence).
  • Platform to discuss and act on various social issues (health, nutrition, domestic violence).

Conclusion: Money simplifies economic transactions immensely. Credit, when available on fair terms, plays a vital role in economic growth and improving livelihoods. However, the high cost and exploitative nature of informal credit remain significant challenges, especially for the poor. Expanding formal credit and supporting initiatives like SHGs are crucial steps towards inclusive development.

Multiple Choice Questions (MCQs):

1. What is the essential problem solved by money, which was inherent in the barter system?
   a) Lack of goods
   b) Double coincidence of wants
   c) Difficulty in transportation
   d) Absence of banks

2. In India, which institution issues currency notes on behalf of the Central Government?
   a) State Bank of India (SBI)
   b) Ministry of Finance
   c) Reserve Bank of India (RBI)
   d) NITI Aayog

3. Deposits in bank accounts that can be withdrawn on demand are called:
   a) Fixed Deposits
   b) Recurring Deposits
   c) Time Deposits
   d) Demand Deposits

4. What is the primary source of income for banks?
   a) Service charges on accounts
   b) Government subsidies
   c) Difference between interest charged on loans and interest paid on deposits
   d) Selling collateral of defaulters

5. An asset that a borrower owns (like land, building, vehicle) and uses as a guarantee to a lender until the loan is repaid is known as:
   a) Interest Rate
   b) Principal Amount
   c) Collateral
   d) Credit Score

6. Which of the following is NOT typically considered part of the 'terms of credit'?
   a) Interest Rate
   b) Collateral Requirement
   c) Borrower's Caste
   d) Mode of Repayment

7. Which body supervises the functioning of formal sources of loans (like banks and cooperatives) in India?
   a) Central Government
   b) State Governments
   c) Reserve Bank of India (RBI)
   d) Self-Help Groups (SHGs)

8. Compared to the formal sector, interest rates in the informal credit sector are generally:
   a) Much lower
   b) Slightly lower
   c) Similar
   d) Much higher

9. What is a major reason why poor households often depend on informal sources of credit?
   a) Informal lenders offer lower interest rates.
   b) Lack of collateral and documentation required by banks.
   c) Banks are only located in urban areas.
   d) Informal loans do not need to be repaid.

10. Self-Help Groups (SHGs) primarily help borrowers overcome the problem of:
    a) High interest rates charged by banks
    b) Lack of demand for loans
    c) Lack of collateral
    d) Finding suitable lenders

Answer Key for MCQs:

1. b) Double coincidence of wants
2. c) Reserve Bank of India (RBI)
3. d) Demand Deposits
4. c) Difference between interest charged on loans and interest paid on deposits
5. c) Collateral
6. c) Borrower's Caste
7. c) Reserve Bank of India (RBI)
8. d) Much higher
9. b) Lack of collateral and documentation required by banks
10. c) Lack of collateral

Make sure you understand the reasoning behind each answer. Revise these concepts thoroughly. Good luck with your preparation!