Money and Credit
"Money makes the WORLD go round. But credit — TRUST — is what makes money work."
1. The Barter System
BARTER = direct EXCHANGE of goods for goods. 'I give you rice. You give me cloth.'
1.1 Limitations of Barter
| Problem | Explanation | Example |
|---|---|---|
| Double coincidence of wants | BOTH parties must WANT what the other has. | You have rice, want shoes. Shoe seller wants rice? If NOT — NO trade. |
| Lack of common measure of value | How many kg of rice = one pair of shoes? HARD to decide. | No STANDARD unit of value. |
| Indivisibility of goods | Can't 'partially' trade a cow for small items. | A cow is WORTH many kg of grain. You can't carry half a cow. |
| Storage problem | Perishable goods (milk, vegetables) cannot be STORED for future trade. | Milk SPOILS in a day. Can't save it for later. |
| No deferred payments | Can't PAY later — goods must be exchanged INSTANTLY. | Credit NOT possible in barter. |
Key Lesson: Barter WORKS only in SIMPLE, small, face-to-face economies. As economies GROW, barter BREAKS DOWN.
2. Money — The Medium of Exchange
Money SOLVES the problems of barter. It is a UNIVERSALLY ACCEPTABLE medium of exchange.
2.1 Functions of Money
| Function | Explanation |
|---|---|
| Medium of exchange | Accepted by EVERYONE for goods and services. |
| Unit of account | All prices are EXPRESSED in money (₹). Common denominator. |
| Store of value | Can be SAVED and used LATER (unlike perishable goods). |
| Standard of deferred payment | Can BORROW today, REPAY later (loans, credit). |
2.2 Forms of Money
| Form | Description | Example |
|---|---|---|
| Commodity money | Items with INTRINSIC value | Gold, silver, salt, cattle |
| Fiat money | Recognised by LAW. NO intrinsic value. | Currency notes and coins issued by RBI |
| Bank money / Demand deposits | Money stored in banks. TRANSFERABLE by cheque. | Savings account, current account balance |
| Digital money | Electronic form | UPI (GPay, PhonePe), debit/credit cards, net banking |
Common Mistake: Students think 'money = currency only'. Actually, MONEY includes CURRENCY + DEMAND DEPOSITS (money in bank accounts that can be withdrawn ON DEMAND). Most modern transactions use bank money, NOT cash.
3. Credit — Borrowing and Lending
Credit = LOAN (borrowing money with a PROMISE to repay, usually with INTEREST).
3.1 Terms of Credit
| Term | Meaning | Example |
|---|---|---|
| Principal | The ORIGINAL loan amount | ₹50,000 borrowed |
| Interest rate | Cost of borrowing (% per year) | 8% per annum (formal) vs 36% (informal) |
| Collateral | ASSET pledged as security (land, gold, house) | If borrower defaults → lender takes collateral |
| Documentation | Papers required for the loan | ID proof, income statement, property papers |
| Repayment schedule | When and how to repay | Monthly EMI, lump sum, or seasonal |
3.2 Formal vs Informal Credit
| Feature | Formal Sector | Informal Sector |
|---|---|---|
| Source | Banks, cooperatives, RBI | Moneylenders, traders, landlords, friends, relatives |
| Regulated by | RBI (follows laws) | NO regulation |
| Interest rate | LOW (7–15% per year) | VERY HIGH (24–60% per year) |
| Need for collateral | YES (requires security) | OFTEN NO (personal relationship) |
| Documentation | Extensive | Minimal |
| Target | Rich, educated, propertied | Poor, uneducated, landless |
| % of rural credit | ~60% (growing) | ~40% (declining but still HIGH) |
Shocking Fact: Despite formal credit growing, MILLIONS of poor Indians still depend on MONEYLENDERS who charge 3–5% PER MONTH (36–60% per year).
3.3 Why Do the Poor Borrow from Moneylenders?
- NO collateral — banks REFUSE loans to the landless poor.
- Complex PAPERWORK — poor are OFTEN illiterate.
- QUICK and EASY — moneylender gives cash IMMEDIATELY, no questions asked.
- NO bank branch in REMOTE villages.
4. Banks — The Heart of Formal Credit
4.1 How Banks Work
'Banks are like MATCHMAKERS. They bring SAVERS (depositors) and BORROWERS (loan seekers) together.'
| Step | What Happens |
|---|---|
| 1. Accept deposits | People DEPOSIT money in savings/current accounts. Banks pay INTEREST (2.5–4% on savings). |
| 2. Keep a fraction | Banks keep only ~15% as CASH (CRR — Cash Reserve Ratio). Rest is AVAILABLE to lend. |
| 3. Lend the rest | Banks give LOANS at HIGHER interest (8–15%). DIFFERENCE is bank's profit (spread). |
| 4. Demand deposits | Cheques and UPI allow TRANSFER of deposits without moving physical cash. |
4.2 The Reserve Bank of India (RBI)
- India's CENTRAL BANK (established 1935, nationalised 1949).
- Controls the money supply in the economy.
- Regulates ALL banks in India.
- Sets policy rates: Repo rate (rate at which RBI lends to banks), Reverse repo rate (rate at which RBI borrows from banks).
- Issues currency: ALL Indian currency notes are issued by RBI (stamped 'I promise to pay the bearer...').
5. Self-Help Groups (SHGs)
SHGs are SMALL groups of 15–20 women (mostly) who SAVE together and LEND to each other.
5.1 How SHGs Work
- Each member saves ₹25–₹100 per month.
- Pooled savings → used for INTERNAL lending (emergencies, small needs).
- After 6–12 months of good SAVING record → bank gives LOAN to the GROUP (NOT individuals).
- Group decides WHO gets how much.
- Loan repayment -> group builds CREDIT HISTORY.
5.2 Why SHGs Are Revolutionary
| Benefit | Explanation |
|---|---|
| No collateral needed | Banks trust the GROUP, not individuals. |
| Low interest | SHGs lend at ~12–24% p.a. vs moneylender's 36–60%. |
| Empowerment | WOMEN gain confidence, decision-making power, financial independence. |
| Economic activities | SHGs start SMALL businesses — tailoring, papad making, goat rearing. |
| Social change | Reduced DOMESTIC violence, better SCHOOLING for children, LATER marriages. |
6. AP Context
6.1 DWACRA — Andhra's SHG Revolution
Andhra Pradesh is the BIRTHPLACE of India's women's SHG movement.
- DWACRA (Development of Women and Children in Rural Areas) — later renamed as AP State Rural Livelihoods Mission (APSRM) / Velugu programme.
- Started in the 1990s — became a NATIONAL model (now NRLM — National Rural Livelihoods Mission).
- AP has ~1 CRORE women in SHGs (one of the HIGHEST in India).
- Key feature: AP's SHGs are NOT just about credit. They also deliver HEALTH, EDUCATION, GOVERNANCE awareness.
6.2 AP Cooperative Banking
- AP has a STRONG cooperative banking network:
- AP State Cooperative Bank (APCOB) — apex cooperative bank.
- District Cooperative Central Banks (DCCBs) — at district level.
- Primary Agricultural Cooperative Societies (PACS) — at village level.
- Cooperatives provide SHORT-TERM credit for seeds, fertilisers, and FARM equipment.
- Kisan Credit Cards (KCC) are OFTEN routed through cooperatives.
7. Exam Focus
| Topic | Marks | Frequency |
|---|---|---|
| Barter system — limitations | 2–3 marks | HIGH |
| Functions of money | 2 marks | HIGH |
| Formal vs Informal credit — differences | 3 marks | HIGH |
| Banks — how they work, demand deposits | 3 marks | Medium |
| SHGs — structure and importance | 3 marks | HIGH |
| AP: DWACRA, cooperative banking | 2–3 marks | HIGH (state board) |
8. Quick Self-Test
Q1. What is 'double coincidence of wants' in the barter system? A. Both parties MUST want what the other offers. If you have rice and want cloth, the cloth seller must WANT rice. If not — NO trade happens.
Q2. State THREE functions of money. A. Medium of exchange, unit of account, store of value (also: standard of deferred payment).
Q3. Differentiate between FORMAL and INFORMAL credit. A. Formal: banks/cooperatives, LOW interest, RBI-regulated, requires collateral. Informal: moneylenders, VERY HIGH interest, NO regulation, easy access.
Q4. How do BANKS create money? A. Banks accept deposits and KEEP only ~15% (CRR). The REST they LEND out. This money circulates back as deposits → more lending → money SUPPLY expands.
Q5. What are SHGs and why are they important? A. Small groups (15–20 women) who save TOGETHER and lend internally. IMPORTANT: no collateral, low interest, women empowerment, bank linkage.
Q6. What is DWACRA and why is AP famous for it? A. DWACRA (now APSRM/Velugu) — AP's women SHG movement. PIONEERED in the 1990s. Became a NATIONAL model. AP has ~1 crore women in SHGs.
Q7. What influence does RBI have over credit in India? A. RBI sets policy rates (repo rate → affects loan interest), controls money supply, regulates banks, issues currency.
Q8. Why do the POOR still borrow from moneylenders despite HIGH interest? A. No collateral (banks refuse), complex paperwork, immediate cash, moneylender is LOCALLY accessible — often the ONLY option.
9. Common Mistakes & Fixes
| Mistake | Fix |
|---|---|
| 'Money = currency only' | Money = currency + DEMAND DEPOSITS (bank balances transferable by cheque/UPI). |
| 'Banks keep all deposits in the vault' | Banks keep only ~15% as CRR. REST is LENT OUT — this is how they EARN profit and CREATE money. |
| 'Formal credit is always available' | Formal credit is HARD for the poor (no collateral, complex paperwork). Informal credit FILLS this gap. |
| 'SHGs give free money' | SHGs are SAVINGS + LOAN groups. They BUILD self-reliance, NOT free money. |
| 'RBI is a commercial bank' | RBI is a CENTRAL BANK (bank to banks). It does NOT take deposits from the general public. |
