Key Points

The barter system is a method of exchange where goods are directly traded without money. Its main drawback is the need for a 'double coincidence of wants', where both parties must have what the other desires.

Money solves the problem of the barter system by acting as an intermediate in the exchange process. This eliminates the need for a double coincidence of wants, making transactions easier.

Modern forms of money consist of currency (paper notes and coins) and demand deposits with banks. Modern currency has no intrinsic use of its own but is accepted as a medium of exchange.

Modern currency is accepted because it is authorized by the government of the country. In India, the Reserve Bank of India (RBI) issues currency notes on behalf of the central government.

Demand deposits are the deposits in bank accounts that can be withdrawn on demand. The cheque facility allows for payments to be settled directly from these deposits without the use of cash.

Banks act as intermediaries between those who have surplus funds (depositors) and those who need funds (borrowers). They use the major portion of deposits to extend loans.

The main source of income for banks is the difference between the interest rate charged from borrowers on loans and the interest rate paid to depositors on their deposits.

Credit can play a positive role by helping people meet expenses and increase their income. However, it can also push borrowers into a debt-trap, a situation from which recovery is very painful.

The terms of credit include the interest rate, collateral (security), documentation requirements, and the mode of repayment. These terms can vary significantly between different credit arrangements.

Collateral is an asset, such as land, buildings, or vehicles, that the borrower owns and uses as a guarantee to a lender until the loan is repaid. Lenders can sell the collateral if the borrower fails to repay.

The formal sector includes loans from banks and cooperatives. The Reserve Bank of India (RBI) supervises their functioning, and they typically charge lower interest rates.

The informal sector includes loans from moneylenders, traders, employers, relatives, and friends. There is no organization to supervise them, and they often charge much higher interest rates.

Richer households often receive credit from formal sources at cheap rates, while poor households have to depend on informal sources with high interest rates, mainly due to the lack of collateral.

The RBI supervises the functioning of formal sources of loans. It ensures banks maintain a minimum cash balance and give loans to small cultivators and borrowers, not just to large businesses.

SHGs are small groups, usually of 15-20 women, who pool their savings to provide loans to members. They help borrowers overcome the problem of lack of collateral and access credit at a reasonable rate.

Founded by Professor Muhammad Yunus, the Grameen Bank is a major success story in providing credit at reasonable rates to the poor, proving that they are reliable borrowers.