Notes for the Teacher - Chapter 3: Money and Credit PDF

NOTES FOR THE TEACHER CHAPTER 3 : MONEY AND CREDIT Money is a fascinating subject and full of a collage of the major areas where people use curiosities. It is important to capture this digital and cash transactions which are...

NOTES FOR THE TEACHER CHAPTER 3 : MONEY AND CREDIT Money is a fascinating subject and full of a collage of the major areas where people use curiosities. It is important to capture this digital and cash transactions which are element for the students. The history of legitimate and legal. They can also discuss the money and how various forms were used at transactions which are legal and why. It is also different times is an interesting story. At this important to intimate students that different stage the purpose is to allow students to types of plastic cards are used in place of cash realise the social situation in which these transactions but not all of them money per se. forms were used. Modern forms of money are Credit is a crucial element in economic linked to the banking system. This is the life and it is, therefore, important to first central idea of the first part of the chapter. understand this in a conceptual manner. The present situation in India, where What are the aspects that one looks at in newer forms of money are slowly spreading any credit arrangement and how this affects with computerisation of the banking system, people is the main focus of the second part offers many opportunities to students to of the chapter. The world around us offers a explore on their own. We need not get into a tremendous variety of such arrangements formal discussion of the ‘functions of money’ and it would be ideal to explain these but let it come up as questions. There are aspects of credit from situations that are certain areas that are not covered, such as familiar to your students. The other crucial ‘creation of money’ (money multiplier) or the issue of credit is its availability to all, backing of the modern system that may be especially the poor, and on reasonable discussed if you desire. terms. We need to emphasise that this is a As you would see in the chapter, the stock right of the people and without which a large of money consists of currency held by the section of them would be kept out of the public and the demand deposits that they hold development process. There are many with the banks. This is the money that people innovative interventions, such as that of can use as they wish and the government has Grameen Bank, of which students may be to ensure that the system works smoothy. made familiar with but it is important to What would happen when the government realise that we don’t have answers to all declares that some of the currency notes used questions. We need to find new ways and by people would be made invalid and would be this is one of the social challenges that replaced by new currency? In India, during developing countries face. November 2016, currency notes in the Sources for Information denomination of Rs. 500 and Rs. 1,000 were declared invalid. People were asked to The data on formal and informal sector credit surrender these notes to the bank by a specific used in this chapter is drawn from the period and receive new Rs. 500, Rs. 2,000 or survey on rural debt by the National Sample Survey Organisation (All India Debt and other currency notes. This is known as Investment Survey, 70 t h Round 2013, ‘demonetisation’. Since then, people were also conducted by NSSO) now known as National encouraged to use their bank deposits rather Statistical Office (NSO). The information and than cash for transactions. Hence, digital data on Grameen Bank is taken from transactions started by using bank-to-bank newspaper reports and websites. In order transfer through the internet or mobile to get the details of bank-related statistics phones, cheques, ATM cards, credit cards, or a particular detail of a bank, you can log and Point of Sale (POS) swipe machines at on to the websites of the Reserve Bank of shops. This is promoted to reduce the India (www.rbi.org) and the concerned requirement of cash for transactions and also banks. Data on self-help groups is provided control corruption. Students could be asked on the website of the National Bank for to debate on the process and the impact of Agriculture and Rural Development demonetisation. They can be guided to make (NABARD) (www.nabard.org). 38 U NDERST ANDING E CONOMIC D EVEL NDERSTANDING OPMENT EVELOPMENT 2020-21  CHAPTER 3 MONEY AND CREDIT MONEY AS A MEDIUM OF EXCHANGE The use of money spans a very large difficult it would be if the shoe part of our everyday life. Look around manufacturer had to directly you and you would easily be able to exchange shoes for wheat without the identify several transactions involving use of money. He would have to look money in any single day. Can you for a wheat growing farmer who not I DON’T NEED make a list of these? In many of these only wants to sell wheat SHOES. I NEED I’LL GIVE transactions, goods are being bought YOU SHOES but also wants to buy the CLOTHES. and sold with the use of money. In FOR YOUR shoes in exchange. some of these transactions, services WHEAT. That is, both parties are being exchanged with money. For have to agree to some, there might not be any actual sell and buy each transfer of money taking place now others commodities. but a promise to pay money later. This is known as double coincidence Have you ever wondered why of wants. What a person transactions are made in I WANT SHOES. desires to sell is exactly what the money? The reason is simple. BUT I DON’T HAVE other wishes to buy. In a barter WHEAT. A person holding money can easily system where goods are directly exchange it for any commodity or exchanged without the use of money, service that he or she might want. double coincidence of wants is an Thus everyone prefers to receive essential feature. payments in money and then exchange the money for things that In contrast, in an economy where they want. Take the case of a shoe money is in use, money by providing manufacturer. He wants to sell shoes the crucial intermediate step in the market and buy wheat. The eliminates the need for double shoe manufacturer will first exchange coincidence of wants. It is no longer shoes that he has produced for necessary for the shoe manufacturer money, and then exchange the money to look for a farmer who will buy his for wheat. Imagine how much more shoes and at the same time sell him M ONEY AND C REDIT 39 2020-21  wheat. All he has to do is find a buyer for his shoes. Once he has exchanged his shoes for money, he can purchase wheat or any other commodity in the market. Since money acts as an intermediate in the exchange process, it is called a medium of exchange. LET’S WORK THESE OUT 1. How does the use of money make it easier to exchange things? 2. Can you think of some examples of goods / services being exchanged or wages being paid through barter? MODERN FORMS OF MONEY We have seen that money is organisation is allowed to issue something that can act as a medium currency. Moreover, the law legalises of exchange in transactions. Before the use of rupee as a medium of Early punch- the introduction of coins, a variety of payment that cannot be refused in marked coins objects was used as money. For settling transactions in India. No (may be 2500 example, since the very early ages, individual in India can legally refuse years old) Indians used grains and cattle as a payment made in rupees. Hence, money. Thereafter came the use of the rupee is widely accepted as a metallic coins — gold, silver, copper medium of exchange. coins — a phase which continued well into the last century. Deposits with Banks Gupta coins The other form in which people hold Currency money is as deposits with banks. At Modern forms of money include a point of time, people need only some currency — paper notes and coins. currency for their day-to-day needs. Unlike the things that were used as For instance, workers who receive money earlier, modern currency is not their salaries at the end of each month made of precious metal such as gold, have extra cash at the beginning of Tughlaq silver and copper. And unlike grain the month. What do people do with coin and cattle, they are neither of this extra cash? They deposit it with everyday use. The modern currency the banks by opening a bank Gold is without any use of its own. account in their name. Banks accept Mohar the deposits and also pay an amount from Then, why is it accepted as a as interest on the deposits. In this way Akbar’s medium of exchange? It is accepted reign people’s money is safe with the as a medium of exchange because the banks and it earns an amount as currency is authorised by the interest. People also have the government of the country. provision to withdraw the money as In India, the Reserve Bank of India and when they require. Since the issues currency notes on behalf of the deposits in the bank accounts can be central government. As per Indian withdrawn on demand, these law, no other individual or deposits are called demand deposits. Modern coin 40 U NDERST ANDING E CONOMIC D EVEL NDERSTANDING OPMENT EVELOPMENT 2020-21  Demand deposits offer another made by cheques instead of cash. interesting facility. It is this facility For payment through cheque, the which lends it the essential payer who has an account with the characteristics of money (that of a bank, makes out a cheque for a medium of exchange). You would specific amount. A cheque is a have heard of payments being paper instructing the bank to pay a specific amount from the person’s account to the person in UNDERSTAND whose name the cheque has been LET US TRY AND YM ENTS ARE HOW CHEQUE PA issued. RE ALISED WITH MADE AND AN EXAMPLE. Cheque Payments A shoe manufacturer, M. Salim has to make a payment to the leather supplier and writes a cheque for a specific amount. This means that the shoe manufacturer instructs his bank to pay this amount to the leather supplier. The leather supplier takes this cheque, and deposits it in his own account in the bank. The money is transferred from one bank account to another bank account in a couple of days. The transaction is complete without any payment of cash. Account number Bank branch code Cheque number Coding used by banks Thus we see that demand deposits You must remember the role that share the essential features of money. the banks play here. But for the The facility of cheques against demand banks, there would be no demand deposits makes it possible to directly deposits and no payments by settle payments without the use of cash. cheques against these deposits. The Since demand deposits are accepted modern forms of money — currency widely as a means of payment, along and deposits — are closely linked to with currency, they constitute money the working of the modern banking in the modern economy. system. M ONEY AND C REDIT 41 2020-21  LET’S WORK THESE OUT 1. M. Salim wants to withdraw Rs 20,000 in cash for making payments. How would he write a cheque to withdraw money? 2. Tick the correct answer. After the transaction between Salim and Prem, (i) Salim’s balance in his bank account increases, and Prem’s balance increases. (ii) Salim’s balance in his bank account decreases and Prem’s balance increases. (iii) Salim’s balance in his bank account increases and Prem’s balance decreases. 3. Why are demand deposits considered as money? LOAN ACTIVITIES OF BANKS Let us take the story of banks further. huge demand for loans for various What do the banks do with the economic activities. We shall read more deposits which they accept from the about this in the following sections. public? There is an interesting Banks make use of the deposits to mechanism at work here. Banks keep meet the loan requirements of the only a small proportion of their people. In this way, banks mediate deposits as cash with themselves. For between those who have surplus example, banks in India these days funds (the depositors) and those who hold about 15 per cent of their are in need of these funds (the deposits as cash. This is kept as borrowers). Banks charge a higher provision to pay the depositors who interest rate on loans than what they might come to withdraw money from offer on deposits. The difference the bank on any given day. Since, on between what is charged from any particular day, only some of its borrowers and what is paid to many depositors come to withdraw depositors is their main source of cash, the bank is able to manage with income. this cash. What do you think wo uld happen Banks use the major portion of the if all the depositors went to ask deposits to extend loans. There is a for their money at th e same time? DEPOSITORS BORROWERS People make People take deposits loans People make People repay withdrawals and loans with get interest interest 42 U NDERST ANDING E CONOMIC D EVEL NDERSTANDING OPMENT EVELOPMENT 2020-21 TWO DIFFERENT CREDIT SITUATIONS A large number of transactions in our day-to-day activities involve credit in some form or the other. 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. Let us see how credit works through the following two examples. (1) Festival Season It is festival season two months from now now and promises to pay him later. and the shoe manufacturer, Salim, has Second, he obtains loan in cash from the received an order from a large trader in large trader as advance payment for town for 3,000 pairs of shoes to be 1000 pairs of shoes with a promise to delivered in a month time. To complete deliver the whole order by the end of the production on time, Salim has to hire a few month. more workers for stitching and pasting At the end of the month, Salim is able to work. He has to purchase the raw deliver the order, make a good profit, and materials. To meet these expenses, Salim repay the money that he had borrowed. obtains loans from two sources. First, he asks the leather supplier to supply leather In this case, Salim obtains credit to meet the working capital needs of production. The credit helps him to meet the ongoing expenses of production, complete production on time, and thereby increase his earnings. Credit therefore plays a vital and positive role in this situation. (2) Swapna’s Problem Swapna, a small farmer, grows groundnut on her three acres of land. She takes a loan from the moneylender to meet the expenses of cultivation, hoping that her harvest would help repay the loan. Midway through the season the crop is hit by pests and the crop fails. Though Swapna sprays her crops with expensive pesticides, it makes little difference. She is unable to repay the moneylender and the debt grows over the year into a large amount. Next year, Swapna takes a fresh loan for cultivation. It is a normal crop this year. But the earnings are not enough to cover the old loan. She is caught in debt. She has to sell a part of the land to pay off the debt. M ONEY AND C REDIT 43 2020-21  In rural areas, the main demand In Swapna’s case, the failure of the for credit is for crop production. Crop crop made loan repayment production involves considerable impossible. She had to sell part of the costs on seeds, fertilisers, pesticides, land to repay the loan. Credit, instead water, electricity, repair of equipment, of helping Swapna improve her etc. There is a minimum stretch of earnings, left her worse off. This is an three to four months between the time example of what is commonly called when the farmers buy these inputs debt-trap. Credit in this case pushes and when they sell the crop. Farmers the borrower into a situation from usually take crop loans at the which recovery is very painful. beginning of the season and repay the In one situation credit helps to loan after harvest. Repayment of the increase earnings and therefore the loan is crucially dependent on the person is better off than before. In income from farming. another situation, because of the crop failure, credit pushes the person into LET’S WORK THESE OUT a debt trap. To repay 1. Fill the following table. her loan she has to sell Salim Swapna a portion of her land. She is clearly much Why did they need credit? worse off than before. What was the risk? Whether credit would What was the outcome? be useful or not, therefore, depends 2. Supposing Salim continues to get orders from traders. What would be on the risks in the his position after 6 years? situation and whether 3. What are the reasons that make Swapna’s situation so risky? Discuss there is some support, factors – pesticides; role of moneylenders; climate. in case of loss. TERMS OF CREDIT Every loan agreement specifies an repayment of the principal. In interest rate which the borrower must addition, lenders may demand pay to the lender along with the collateral (security) against loans. 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. If the borrower fails to repay the loan, the lender has the right to sell the asset or collateral to obtain payment. Property such as land titles, deposits with banks, livestock are some common examples of collateral used for borrowing. 2020-21  A House Loan Megha has taken a loan of Rs 5 lakhs from the bank to purchase a house. The annual interest rate on the loan is 12 per cent and the loan is to be repaid in 10 years in monthly instalments. Megha had to submit to the bank, documents showing her employment records and salary before the bank agreed to give her the loan. The bank retained as collateral the papers of the new house, which will be returned to Megha only when she repays the entire loan with interest. Fill the following details of Megha’s housing loan. Loan amount (in Rupees) Duration of loan Documents required Interest rate Mode of repayment Collateral Interest rate, collateral and documentation requirement, and the mode of repayment together comprise what is called the terms of credit. The terms of credit vary substantially from one credit arrangement to another. They may vary depending on the nature of the lender and the borrower. The next section will provide examples of the varying terms of credit in different credit arrangements. LET’S WORK THESE OUT 1. Why do lenders ask for collateral while lending? 2. Given that a large number of people in our country are poor, does it in any way affect their capacity to borrow? 3. Fill in the blanks choosing the correct option from the brackets. While taking a loan, borrowers look for easy terms of credit. This means __________ (low/high) interest rate, ______________(easy/ tough) conditions for repayment, ___________(less/more) collateral and documentation requirements. M ONEY AND C REDIT 45 2020-21  Variety of Credit Arrangements Example of a Village Rohit and Ranjan had finished reading about the terms of credit in class. They were eager to know the various credit arrangements that existed in their area: who were the people who provided credit? Who were the borrowers? What were the terms of credit? They decided to talk to some people in their village. Read what they record... 15th Nov, 2019. rm er s a n d r th e fi el d s w h er e m o s t fa The fields tl y fo e day. W e h ea d d ir ec be working at this time of th hyamal, a small ou ld ee t S labourers w We first m e plan ted w it h potato crops. d village. ar te er in S on pu r, a small irriga farm We next meet Arun who is supervising the work of one farm labourer. Arun has seven Shyamal tells us that every season he needs acres of land. He is one of the few persons loans for cultivation on his 1.5 acres of land. Till in Sonpur to receive bank loan for a few years back, he would borrow money from cultivation. The interest rate on the loan the village moneylender at an interest rate of is 8.5 per cent per annum, and can be repaid five per cent per month (60% per annum). anytime in the next three years. Arun plans For the last few years, Shyamal has been to repay the loan after harvest by selling a borrowing from an agricultural trader in the part of the crop. He then intends to store village at an interest rate of three per cent the rest of the potatoes in a cold storage per month. At the beginning of the cropping and apply for a fresh loan from the bank season, the trader supplies the farm inputs on against the cold storage receipt. The bank credit, which is to be repaid when the crops offers this facility to farmers who have are ready for harvest. taken crop loan from them. Besides the interest charge on the loan, the trader also makes the farmers promise to Rama is working in a neigh bouri sell the crop to him. This way the trader wo rks as an agricultural lab ng field. She can ensure that the money is repaid several months in the ye ourer. There are ar when Rama has promptly. Also, since the crop prices are low no work, and needs credit to meet the daily after the harvest, the trader is able to expenses. Expenses on sudden illnesses or make a profit from buying the crop at a low functions in the family ar e also met through price from the farmers and then selling it loa ns. Rama has to depend on her employer, later when the price has risen. a medium landowner in Sonpur, for credit. The landowner charges an interest rate of 5 per cent per month. Rama repays the money by working for th e landowner. Most of the time, Rama has to take a fresh loan, before the previous loa n has been repaid. At pr es en t, sh e ow es th e lan do wn er Rs 5,000. Though the landowner doesn’t treat her well, she continu es to work for him since she can get loans from him when in need. Rama tells us that th credit for the landless pe e only source of ople in Sonpur are the landowner-employers. 2020-21 Loans from Cooperatives Besides banks, the other major source of cheap credit in rural areas are the cooperative societies (or cooperatives). Members of a cooperative pool their resources for cooperation in certain areas. There are several types of cooperatives possible such as far mers cooperatives, weavers cooperatives, industrial workers cooperatives, etc. Krishak Cooperative functions in a village not very far away from Sonpur. It has 2300 farmers as members. It accepts deposits from its members. With these deposits as collateral, the Cooperative has obtained a large loan from the bank. These funds are used to provide loans to members. Once these loans are repaid, another round of lending can take place. Krishak Cooperative provides loans for the purchase of agricultural implements, loans for cultivation and agricultural trade, fishery loans, loans for construction of houses and for a variety of other expenses. LET’S WORK THESE OUT 1. List the various sources of credit in Sonpur. 2. Underline the various uses of credit in Sonpur in the above passages. 3. Compare the terms of credit for the small farmer, the medium farmer and the landless agricultural worker in Sonpur. 4. Why will Arun have a higher income from cultivation compared to Shyamal? 5. Can everyone in Sonpur get credit at a cheap rate? Who are the people who can? 6. Tick the correct answer. (i) Over the years, Rama’s debt · will rise. · will remain constant. · will decline. (ii) Arun is one of the few people in Sonpur to take a bank loan because · other people in the village prefer to borrow from the moneylenders. · banks demand collateral which everyone cannot provide. · interest rate on bank loans is same as the interest rate charged by the traders. 7. Talk to some people to find out the credit arrangements that exist in your area. Record your conversation. Note the differences in the terms of credit across people. M ONEY AND C REDIT 47 2020-21 FORMAL SECTOR CREDIT IN INDIA We have seen in the above examples that Graph 1 : Sources of Credit per Rs 1000 people obtain loans from of Rural Households in India in 2012 various sources. The Other non various types of loans Institutional Government 1% can be conveniently Agencies 2% grouped as formal Relatives and sector loans and Friends 8% Cooperative informal sector loans. Society/Banks 25% Among the former are loans from banks Money Lender and cooperatives. The 33% informal lenders include Commercial Banks 25% moneylenders, traders, employers, relatives and friends, etc. In Graph 1 Landlords 1% Other Institutional you can see the various Agencies 5% sources of credit to rural households in India. Is more credit the RBI sees that the banks give loans coming from the formal sector or the not just to profit-making businesses informal sector? and traders but also to small cultivators, small scale industries, to The Reserve Bank of India small borrowers etc. Periodically, supervises the functioning of formal banks have to submit information to sources of loans. For instance, we the RBI on how much they are have seen that the banks maintain a lending, to whom, at what interest minimum cash balance out of the rate, etc. deposits they receive. The RBI monitors the banks in actually There is no organisation which maintaining cash balance. Similarly, supervises the credit activities of lenders in the informal sector. They BUT WHY SHOULD can lend at whatever interest rate they A BANK WANT US TO HAVE A HIGHER INCOME? 2020-21 choose. There is no one to stop them Formal and Informal Credit: from using unfair means to get their Who gets what? money back. Graph 2 shows the importance of Compared to the formal lenders, formal and informal sources of credit most of the informal lenders charge a for people in urban areas. The people much higher interest on loans. Thus, are divided into four groups, from the cost to the borrower of informal poor to rich, as shown in the figure. loans is much higher. You can see that 85 per cent of the Higher cost of borrowing means a loans taken by poor households in the larger part of the earnings of the urban areas are from informal borrowers is used to repay the loan. sources. Compare this with the rich Hence, borrowers have less income urban households. What do you left for themselves (as we saw for find? Only 10 per cent of their loans Shyamal in Sonpur). In certain are from informal sources, while 90 cases, the high interest rate for per cent are from formal sources. A borrowing can mean that the amount similar pattern is also found in rural to be repaid is greater than the areas. The rich households are income of the borrower. This could availing cheap credit from formal lead to increasing debt (as we saw for lenders whereas the poor households Rama in Sonpur) and debt trap. Also, have to pay a large amount for people who might wish to start an borrowing. enterprise by borrowing may not do What does all this suggest? First, so because of the high cost of the formal sector still meets only about borrowing. half of the total credit needs of the For these reasons, banks and rural people. The remaining credit cooperative societies need to lend needs are met from informal sources. more. This would lead to higher incomes Graph 2 : Of all the loans taken by urban housholds, what and many people percentage was formal and what percentage was informal? could then borrow cheaply for a variety of needs. They 15% 10% could grow crops, do 28% business, set up 53% 47% 85% 72% 90% small-scale industries etc. They could set up new industries or poor households well-off rich trade in goods. Cheap housholds with few assets households households and affordable credit is crucial for the BLUE : Per cent of loans from the INFORMAL sector country’s develop- ment. PURPLE : Per cent of loans from the FORMAL sector M ONEY AND C REDIT 49 2020-21  Most loans from informal lenders Secondly, while formal sector carry a very high interest rate and do loans need to expand, it is also little to increase the income of the necessary that everyone receives borrowers. Thus, it is necessary these loans. At present, it is the richer that banks and cooperatives households who receive formal credit increase their lending particularly whereas the poor have to depend on in the rural areas, so that the the informal sources. It is important dependence on informal sources that the formal credit is distributed of credit reduces. more equally so that the poor can benefit from the cheaper loans. LET’S WORK THESE OUT 1. What are the differences between formal and informal sources of credit? 2. Why should credit at reasonable rates be available for all? 3. Should there be a supervisor, such as the Reserve Bank of India, that looks into the loan activities of informal lenders? Why would its task be quite difficult? 4. Why do you think that the share of formal sector credit is higher for the richer households compared to the poorer households? A worker stitching a quilt DO YOU THINK A BANK WILL GIVE ME A LOAN? SELF-HELP GROUPS FOR THE POOR In the previous section we have seen documents and collateral. Absence of that poor households are still collateral is one of the major reasons dependent on informal sources of which prevents the poor from getting credit. Why is it so? Banks are not bank loans. Informal lenders such as present everywhere in rural India. moneylenders, on the other hand, Even when they are present, getting a know the borrowers personally and loan from a bank is much more hence are often willing to give a difficult than taking a loan from loan without collateral. The borrowers informal sources. As we saw for can, if necessary, approach the Megha, bank loans require proper moneylenders even without repaying 50 U NDERST ANDING E CONOMIC D EVEL NDERSTANDING OPMENT EVELOPMENT 2020-21 their earlier loans. However, the to be granted — the purpose, amount, moneylenders charge very high rates interest to be charged, repayment of interest, keep no records of the schedule etc. Also, it is the group transactions and harass the poor which is responsible for the repayment borrowers. of the loan. Any case of non- repayment of loan by any one In recent years, people have tried member is followed up seriously by out some newer ways of providing other members in the group. Because loans to the poor. The idea is to of this feature, banks are willing to organise rural poor, in particular lend to the poor women when women, into small Self Help Groups organised in SHGs, even though they (SHGs) and pool (collect) their have no collateral as such. savings. A typical SHG has 15-20 members, usually belonging to one Thus, the SHGs help borrowers neighbourhood, who meet and save overcome the problem of lack of regularly. Saving per member varies collateral. They can get timely loans from Rs 25 to Rs 100 or more, for a variety of purposes and at a depending on the ability of the people reasonable interest rate. Moreover, to save. Members can take small loans SHGs are the building blocks of from the group itself to meet their organisation of the rural poor. Not needs. The group charges interest on only does it help women to become these loans but this is still less than financially self-reliant, the regular what the moneylender charges. After meetings of the group provide a a year or two, if the group is regular platform to discuss and act on a in savings, it becomes eligible for variety of social issues such as health, availing loan from the bank. nutrition, domestic violence, etc. Loan is sanctioned in the name of the group and is A women’s self-help group meeting in Gujarat meant to create self- employment opportunities for the members. For instance, small loans are provided to the members for releasing mortgaged land, for meeting working capital needs (e.g. buying seeds, fertilisers, raw materials like bamboo and cloth), for housing materials, for acquiring assets like sewing machine, handlooms, cattle, etc. Most of the important decisions regarding the savings and loan activities are taken by the group members. The group decides as regards the loans M ONEY AND C REDIT 51 2020-21  Grameen Bank of Bangladesh Grameen Bank of Bangladesh is one of the biggest success stories in reaching the poor to “If credit can be made available to meet their credit needs at reasonable rates. the poor people on terms and Started in the 1970s as a small project, conditions that are appropriate and Grameen Bank in 2018 had over 9 million reasonable these millions of small members in about 81,600 villages spread people with their millions of small across Bangladesh. Almost all of the borrowers pursuits can add up to create the are women and belong to poorest sections of biggest development wonder.” the society. These borrowers have proved that Professor Muhammad Yunus, not only are poor women reliable borrowers, but the founder of Grameen Bank, that they can start and run a variety of small and recipient of 2006 Nobel Prize for Peace income-generating activities successfully. SUMMING UP In this chapter we have looked at the credit vary substantially between modern forms of money and how they formal and informal lenders. At are linked with the banking system. present, it is the richer households On one side are the depositors who who receive credit from formal sources keep their money in the banks and on whereas the poor have to depend on the other side are the borrowers who the informal sources. It is essential take loans from these banks. Economic that the total formal sector credit activities require loans or credit. Credit, increases so that the dependence on as we saw can have a positive impact, the more expensive informal credit or in certain situations make the becomes less. Also, the poor should borrower worse off. get a much greater share of formal Credit is available from a variety of loans from banks, cooperative sources. These can be either formal societies etc. Both these steps are sources or informal sources. Terms of important for development. EXERCISES 1. In situations with high risks, credit might create further problems for the borrower. Explain. 2. How does money solve the problem of double coincidence of wants? Explain with an example of your own. 3. How do banks mediate between those who have surplus money and those who need money? 4. Look at a 10 rupee note. What is written on top? Can you explain this statement? 5. Why do we need to expand formal sources of credit in India? 6. What is the basic idea behind the SHGs for the poor? Explain in your own words. 7. What are the reasons why the banks might not be willing to lend to certain borrowers? 52 U NDERST ANDING E CONOMIC D EVEL NDERSTANDING OPMENT EVELOPMENT 2020-21  8. In what ways does the Reserve Bank of India supervise the functioning of banks? Why is this necessary? 9. Analyse the role of credit for development. 10. Manav needs a loan to set up a small business. On what basis will Manav decide whether to borrow from the bank or the moneylender? Discuss. 11. In India, about 80 per cent of farmers are small farmers, who need credit for cultivation. (a) Why might banks be unwilling to lend to small farmers? (b) What are the other sources from which the small farmers can borrow? (c) Explain with an example how the terms of credit can be unfavourable for the small farmer. (d) Suggest some ways by which small farmers can get cheap credit. 12. Fill in the blanks: (i) Majority of the credit needs of the _________________households are met from informal sources. (ii) ___________________costs of borrowing increase the debt-burden. (iii) __________________ issues currency notes on behalf of the Central Government. (iv) Banks charge a higher interest rate on loans than what they offer on __________. (v) _______________ is an asset that the borrower owns and uses as a guarantee until the loan is repaid to the lender. 13. Choose the most appropriate answer. (i) In a SHG most of the decisions regarding savings and loan activities are taken by (a) Bank. (b) Members. (c) Non-government organisation. (ii) Formal sources of credit does not include (a) Banks. (b) Cooperatives. (c) Employers. ADDITIONAL PROJECT / ACTIVITY The following table shows people in a variety of occupations in urban areas. What are the purposes for which the following people might need loans? Fill in the column. Occupations Reason for needing a Loan Construction worker Graduate student who is computer literate A person employed in government service Migrant labourer in Delhi Household maid Small trader Autorickshaw driver A worker whose factory has closed down Next, classify the people into two groups based on whom you think might get a bank loan and those who might not. What is the criterion that you have used for classification? M ONEY AND C REDIT 53 2020-21