- The use of money spans a very large part of our everyday life.
- why transactions are made in money? The reason is simple. A person holding money can easily exchange it for any commodity or service that he or she might want.
- When both parties have to agree to sell and buy each others commodities. This is known as double coincidence of wants.
- In a barter system where goods are directly exchanged without the use of money, double coincidence of wants is an essential feature.
- economy where money is in use, money by providing the crucial intermediate step eliminates the need for double coincidence of wants.
Since money acts as an intermediate in the exchange process, it is called a medium of exchange.
- Before the introduction of coins, a variety of objects was used as money. For example, since the very early ages, Indians used grains and cattle as money.
- Thereafter came the use of metallic coins — gold, silver, copper coins — a phase which continued well into the last century.
- Modern forms of money include currency — paper notes and coins. Unlike the things that were used as money earlier, modern currency is not made of precious metal such as gold, silver and copper.
- And unlike grain and cattle, they are neither of everyday use. The modern currency is without any use of its own.
- It is accepted as a medium of exchange because the currency is authorised by the government of the country.
In India, the Reserve Bank of India issues currency notes on behalf of the central government. As per Indian law, no other individual or organisation is allowed to issue currency. Moreover, the law legalises the use of rupee as a medium of payment that cannot be refused in settling transactions in India. No individual in India can legally refuse a payment made in rupees. Hence, the rupee is widely accepted as a medium of exchange.
Deposits with Banks
- The other form in which people hold money is as deposits with banks.
- Banks accept the deposits and also pay an amount as interest on the deposits. In this way people’s money is safe with the banks and it earns an amount as interest. People also have the provision to withdraw the money as and when they require.
- Since the deposits in the bank accounts can be withdrawn on demand, these deposits are called demand deposits.
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.
- Banks keep only a small proportion of their deposits as cash with themselves.
- In India these days hold about 15 per cent of their deposits as cash. This is kept as provision to pay the depositors who might come to withdraw money from the bank on any given day.
- Banks use the major portion of the deposits to extend loans. There is a huge demand for loans for various economic activities.
- Banks charge a higher interest rate on loans than what they offer on deposits. The difference between what is charged from borrowers and what is paid to depositors is their main source of income.
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.
- Credit plays a vital and positive role in some situation.
- Credit in some case pushes the borrower into a situation from which recovery is very painful.
Collateral is an asset that the borrower owns (such as land, building, vehicle, livestocks, deposits with banks) and uses this as a guarantee to a lender until the loan is repaid.
Interest rate, collateral and documentation requirement, and the mode of repayment together comprise what is called the terms of credit.
- The various types of loans can be conveniently grouped as formal sector loans and informal sector loans. Among the former are loans from banks and cooperatives.
- The informal lenders include moneylenders, traders, employers, relatives and friends, etc.
The Reserve Bank of India supervises the functioning of formal sources of loans.
There is no organisation which supervises the credit activities of lenders in the informal sector. They can lend at whatever interest rate they choose. There is no one to stop them from using unfair means to get their money back.
Cheap and affordable credit is crucial for the country’s development.
- It is necessary that banks and cooperatives increase their lending particularly in the rural areas, so that the dependence on informal sources of credit reduces.
- Secondly, while formal sector loans need to expand, it is also necessary that everyone receives these loans.
- Banks are not present everywhere in rural India. Even when they are present, getting a loan from a bank is much more difficult than taking a loan from informal sources.
- Absence of collateral is one of the major reasons which prevents the poor from getting bank loans. Informal lenders such as moneylenders, on the other hand, know the borrowers personally and hence are often willing to give a loan without collateral.
- In recent years, people have tried out some newer ways of providing loans to the poor. The idea is to organise rural poor, in particular women, into small Self Help Groups (SHGs) and pool (collect) their savings.
Benifits of SHGs
- SHGs help borrowers overcome the problem of lack of collateral. They can get timely loans for a variety of purposes and at a reasonable interest rate.
- Moreover, SHGs are the building blocks of organisation of the rural poor.
- Not only does it help women to become financially self-reliant, the regular meetings of the group provide a platform to discuss and act on a variety of social issues such as health, nutrition, domestic violence, etc.