Money and Credit Quiz

Money and Credit

• Money is a fascinating subject, tracing its history and various forms through time
• Modern money is linked to banking systems
• Understanding how newer forms of money are spreading in India due to computerization, is important
• Money consists of currency held by the public and demand deposits with banks
• Money is essential for social transactions and economic development
• The government ensures the smooth function of the monetary system
• Demonetization (India, 2016) involved invalidating and replacing currency notes of specific denominations; this encourages digital transactions.

Functions of Money

• Money serves as a medium of exchange, facilitating transactions without the need for a double coincidence of wants
• Money streamlines exchanges between diverse goods and services
• A system of barter (direct exchange) has limitations compared to a monetary system
• Money allows for the exchange of goods/services at varying times
• Money permits the exchange at different places

Modern Forms of Money

• Modern money includes currency (paper notes and coins), and deposits with banks
• Currency is authorized by the government and is widely accepted as a medium of exchange
• Bank deposits are withdrawable on demand, considered money for transactions
• A person can pay using their deposit via a check instructing the bank to transfer money to another person

Cheque Payments

• Payment by cheque involves writing a check and instructing the bank to transfer money to another party
• Payments using cheques do not involve physical cash transfer
• Cheques and demand deposits are widely accepted as a form of money

Loan Activities of Banks

• Banks receive deposits and use a portion to provide loans to others
• Loan demand is high for various economic activities
• Banks evaluate borrowers' creditworthiness and determine loan eligibility
• Banks charge borrowers interest, which helps fund operations
• Deposits and loans are closely linked to the modern banking system

Two Different Credit Situations

• Credit is essential in daily life
• Temporary credit needs can be met via loans (e.g., for festivals or production needs)
• Credit is vital for economic activities

Formal vs. Informal Credit

• Formal credit is provided by banks and cooperatives, often with collateral and lower interest rates.
• Informal credit is provided by moneylenders or relatives and often at higher interest rates.
• Formal sector loans reach a larger part of the population as compared to informal ones
• Poor households rely more on informal credit sources

Self-Help Groups (SHGs)

• SHGs provide a way for disadvantaged communities to secure loans & economic empowerment
• SHGs aid with collateral since they help with savings and loan schemes
• Lending to SHGs is more favorable than lending to individual borrowers in many cases

Grameen Bank

• Grameen Bank's success shows the effectiveness of loan programs for the poor.
• The model encourages women to start and run various businesses using loans.