Money and Credit — RBSE Class 10 (Economics)
Imagine trying to buy shoes by offering wheat — and the shoemaker doesn't want wheat. That's the problem money solves. And when you need more money than you have, you borrow — credit. But credit can lift a farmer to a good harvest or trap them in a debt-cycle. This chapter is about how money and credit really work, and for whom.
1. Money as a medium of exchange
Before money, people used barter — directly swapping goods. Barter needs a double coincidence of wants (both sides must want what the other has) — clumsy and rare.
Money removes this: it is a medium of exchange everyone accepts. You sell for money, then buy with money. A currency is money because the government authorises it (the Reserve Bank of India issues notes on behalf of the government) and the law accepts it as legal tender.
Modern forms of money: currency (notes and coins) and deposits with banks. People deposit extra money in banks (which pay interest and keep it safe) and can withdraw on demand (demand deposits), pay by cheque, card or UPI — so deposits are also money.
2. Banks and the creation of credit
Banks keep only a small part of deposits as cash reserves (to meet withdrawals) and lend out the rest. They charge borrowers a higher interest than they pay depositors — the difference is the bank's income. Thus banks mediate between those with surplus (depositors) and those who need funds (borrowers), and are the major source of credit in the economy.
3. Credit — its two sides
Credit (loan) = an agreement where the lender provides money/goods now in return for repayment with interest later.
Credit has two very different outcomes:
- Positive: it can help a business/farmer expand, produce more and earn — leading to higher income (e.g. a festival-season order fulfilled with a loan).
- Negative (debt-trap): if the venture fails (e.g. crop failure), the borrower must sell land/assets to repay and ends up worse off.
So whether credit helps or harms depends on the risks and the terms.
4. Terms of credit and collateral
Every loan has terms of credit: the interest rate, collateral, documentation and mode of repayment.
Collateral is an asset (land, building, vehicle, deposits) the borrower pledges; the lender can sell it if the loan isn't repaid. The poor often lack collateral, so formal lenders refuse them — pushing them to informal lenders.
5. Formal vs informal sources of credit
- Formal sector — banks and cooperatives; supervised by the Reserve Bank of India (RBI), which ensures fair, lower interest rates and monitors lending.
- Informal sector — moneylenders, traders, employers, relatives; no supervision, often very high interest and harsh terms, which can trap borrowers.
The poor depend more on the costly informal sector. More formal credit (at fair rates) must reach the poor and rural areas — this is essential for development.
6. Self-Help Groups (SHGs) for the poor
To bring cheap credit to the poor (especially rural women) without collateral, Self-Help Groups were formed: 15–20 members save small amounts regularly, and the pooled savings are lent to members at low interest. After a period, the group becomes eligible for bank loans (in the group's name), which are shared out. SHGs also build organisation, self-reliance and women's empowerment, and reduce dependence on moneylenders.
7. Closing thought
Money ended the barter problem and now flows largely as bank deposits; credit can raise incomes or trap the borrower depending on terms and risk. Learn money's role and modern forms, banks and credit creation, formal vs informal sources (RBI's role), collateral and terms, and SHGs. In the RBSE board this chapter reliably gives definition and formal-vs-informal questions worth 5–6 marks.
