Money and Credit

Money & Credit

v Money - Anything which is generally accepted as payment for goods & services.

v Main Function – Medium of Exchange

v History of Money

Ø Barter system existed – prehistoric times

Ø Double coincidence of wants main feature

Ø Later  ‘cowry’  (sea shells ) came into usages

Ø Acc. To Herodotus ‘lydians’ (people around black sea ) were the first to introduce the use of gold & silver coins (650-600B.C) 

Ø India

Ø Punch –Marked coins (2500 years ago) ,earliest coins.

Ø Gupta Coins- Gold & Silver

Ø Tughlaq- Token Currency

Ø Akbar – gold mohar

Ø Paper Money was first used in China (7 century A.D)

Ø Money avoid the inefficiencies of barter system, such as ‘double coincidence of wants’

v Modern form of currency

1.  Cash (Bank Notes & Coin)

Ø Not made of precious metals- stainless steel

Ø Authorized by Govt.

Ø No Individual Can Legally refuse a payment made in rupee .

2.  Demand Deposits

Ø i.e Money Deposited with banks .

Ø Banks accept deposit & also Pay Interests.

Ø Deposits in banks can be withdrawn on demand.

3.  Cheque

Ø Cheque facility directly settle payments without use of cash .  In India cheque is valid for 3 months from the date of issue .

v Credit (loan)

Ø A Contractual agreement in which borrower receives something valuable & agrees to repay the lender at some later time .

v Bank Credit

Ø India banks keep 15% as cash and 85% is given as loan to borrower.

Reason:

Ø Depositor might ask for cash.

Ø Banks use the major portion to extend loans.

Ø Thus Banks mediate those who have surplus funds( depositor) and those who need funds (borrower) .

v Terms of credit

    I.        Collateral: asset that borrower own which is a guarantee to a lender until loan repaid.

  II.        Interest Rate

III.        Documents

IV.        Mode of Repayment

v Two Different credit situation

Ø Situation one – Earning improves

Ø Situation two –debt trap mainly agricultural Sector.

v Formal Sector

                    I.        Banks

                  II.        Co operatives

Ø RBI Supervise functioning of formal source of loan .

    I.        Monitors cash balance

  II.        Monitors Loans available to cultivators & small scale industries.

III.        Periodic auditing of loans , interest rate etc.

Ø Formal sector meets ½ of rural credit needs.

v Informal Sector

Ø No Organizational Supervision

Ø Lenders- Money lenders, traders, employers, relatives & friends.

Ø High Interest rate

v SHGs (Self Help Groups )

Ø 15- 20 members

Ø Pool  their savings

Ø Give Loan to members in need .

Note

    I.        A.T.M: Automated Teller Machine

  II.        Smart Money : Credit Card

III.        D.D. : Demand Draft