Class IX, Economics Chapter 3: Money and Credit
Topic/Section Key Figure / (Points to Include)
Concept /
Event
Overview Money as a POSSIBLE QUESTION: How does money solve the problem of
Medium of double coincidence of wants? Explain with an example.
Exchange
1. The use of money spans a very large part of our everyday life.
2. In many transactions, goods are being bought and sold with the
use of money; services are being exchanged with money.
3. Money as a Medium of Exchange: Money acts as an
intermediate step in the exchange process.
4. Eliminates Double Coincidence of Wants: In an economy
where money is in use, it eliminates the need for double
coincidence of wants.
5. Example (Shoe Manufacturer): A shoe manufacturer wants to
sell shoes and buy wheat. With money, he first exchanges shoes
for money, and then exchanges the money for wheat. It is no
longer necessary for him to look for a farmer who will buy his
shoes and at the same time sell him wheat.
What is Money? Barter System, POSSIBLE QUESTION: Explain the concept of 'double
Double coincidence of wants' in a barter system. 5 M
Coincidence of
Wants Or
What is a barter system, and how does money address
limitations of this system? 5 M
1. Barter System: A system where goods are directly exchanged
without the use of money.
2. Problem in Barter:
A-
B-
C-
3. Double Coincidence of Wants: This refers to a situation where
both parties have to agree to sell and buy each other’s
commodities. What a person desires to sell is exactly what the
other wishes to buy.
Eg: It is difficult if a shoe manufacturer has to directly exchange
shoes for wheat without money, as he would need to find a farmer
who not only wants to sell wheat but also wants to buy shoes.
4. Money's Solution: Money, by providing the crucial intermediate
step, eliminates the need for double coincidence of wants. This
makes transactions easier and more efficient.
Modern Forms POSSIBLE QUESTION: List the modern forms of money. ⅔ M
of Money
Why is modern currency accepted as a medium of exchange
even though it has no intrinsic use? 5 M
[Link] example, since the very early ages, Indians used grains and
cattle as money. Thereafter came the use of metallic coins —
gold, silver, copper coins
2. Modern Forms of Money: Modern forms of money include
currency (paper notes and coins) and deposits with banks.
3. Contrast with Earlier Forms: , modern currency is not made of
precious metal such as gold, silver and copper. And unlike grain
and cattle, they are neither of everyday use. The modern currency
is without any use of its own.
3. Why it is Accepted:
-It is accepted as a medium of exchange because the currency is
authorised by the government of the country.
-RBI's Role in India: In India, the Reserve Bank of India (RBI)
issues currency notes on behalf of the central government.
-Legal Tender: As per Indian law, no other individual or
organisation is allowed to issue currency. The law legalises the
use of rupee as a medium of payment that cannot be refused in
settling transactions in India.
-No individual in India can legally refuse a payment made in
rupees. Hence, the rupee is widely accepted as a medium of
exchange.
Deposits with POSSIBLE QUESTION: Explain 'demand deposits' and how
Banks (Demand they function as money. 5 M
Deposits)
1. Depositing Surplus Money: People need only some currency
for their day-to-day needs. They deposit extra cash with banks by
opening a bank account in their name.
2. Benefits for Depositors:
-Banks accept the deposits and also pay an amount as interest on
the deposits.
-This way, people’s money is safe with the banks and it earns
interest.
3. Withdrawal Facility: People have the provision to withdraw the
money as and when they require.
4. Definition of Demand Deposits: Since the deposits in the
bank accounts can be withdrawn on demand, these deposits are
called demand deposits.
5. Essential Characteristics of Money: Demand deposits share
the essential features of money. The facility of cheques against
demand deposits makes it possible to directly settle payments
without the use of cash.
Cheque POSSIBLE QUESTION: What is a cheque, and how does it
Payments enable cashless transactions?
1. Definition of Cheque: A cheque is a written instruction issued
by the account holder, directing the bank to pay a specific amount
to the person or entity named on the cheque (payee).
2. Mechanism: For payment through cheque, the payer who has
an account with the bank, makes out a cheque for a specific
amount. The payee deposits this cheque in their own account in
the bank.
3. Cashless Transfer: 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.
4. Function: Cheques serve as an alternative to physical cash,
enabling cashless transactions.
Demonetisation POSSIBLE QUESTION: Describe the impact of
(November demonetisation in India in November 2016 and how it
2016) promoted digital transactions.
1. Event: In India, during November 2016, currency notes in the
denomination of Rs. 500 and Rs. 1,000 were declared invalid.
People were asked to surrender these notes to the bank by a
specific period and receive new Rs. 500, Rs. 2,000 or other
currency notes. This is known as ‘demonetisation’.<br>2. Shift to
Digital: Since then, people were also encouraged to use their
bank deposits rather than cash for transactions.<br>3. Digital
Methods: Digital transactions started by using bank-to-bank
transfer through the internet or mobile phones, cheques, ATM
cards, credit cards, and Point of Sale (POS) swipe machines at
shops.<br>4. Objectives: This was promoted to reduce the
requirement of cash for transactions and also to control corruption.
Section 4: Loan Activities of Banks
Topic/Section Key Figure / (Points to Include)
Concept /
Event
Loan Activities of Banks' Cash POSSIBLE QUESTION: How do banks use deposits to extend
Banks Reserve loans?
Mechanism
Explain the concept of cash reserves kept by banks.
1. Accepting Deposits: Banks accept deposits from the public.
2. Cash Reserve: Banks in India hold about 5 per cent of their
deposits as cash with themselves.
3. Purpose of Reserve: This cash is kept as provision to pay the
depositors who might come to withdraw money from the bank on any
given day.
4. Lending Majority of Deposits (Credit) : Since only some
depositors come to withdraw cash on any particular day, the bank is
able to manage with this cash. Banks use the major portion of the
deposits to extend loans.
5. Meeting Loan Demand: There is a huge demand for loans for
various economic activities. Banks use deposits to meet the loan
requirements of the people.
Bank POSSIBLE QUESTION: Explain how banks generate their
Income income and their role as financial intermediaries.
1. Mediation: Banks mediate between those who have surplus funds
(the depositors) and those who are in need of these funds (the
borrowers).
2. Interest Rate Differential: Banks charge a higher interest rate on
loans than what they offer on deposits.
3. Main Income Source: The difference between what is charged
from borrowers and what is paid to depositors is their main source of
income.
Section 5: Two Different Credit Situations
Topic/Section Key Figure (Points to Include)
/ Concept /
Event
Credit Situations Credit POSSIBLE QUESTION: Define credit and explain its significance in
(Loan) day-to-day economic activities.
Definition
1. Definition: 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.
2. Economic Role: Credit is a crucial element in economic life,
enabling individuals and businesses to meet various needs and
undertake activities without immediate full payment.
- Increase economic activities
Positive POSSIBLE QUESTION: Provide an example of how credit can play
Credit a vital and positive role in economic production and income
(Salim's generation.
Case)
1. Situation: Salim, a shoe manufacturer, receives a large order to be
delivered in a month.
2. Need for Credit: To complete production on time, Salim needs to
hire more workers and purchase raw materials.
3. Sources of Credit: He obtains loans from two sources: the leather
supplier (supplies leather now, pays later) and the large trader (advance
payment for 1000 pairs of shoes).
4. Outcome: Salim delivers the order, makes a good profit, and repays
the borrowed money.
5. Positive Role: Credit helps Salim meet the working capital needs of
production, complete production on time, and thereby increase his
earnings. Credit plays a vital and positive role in this situation.
Negative POSSIBLE QUESTION: Explain the concept of a 'debt-trap' using
Credit / an example. What factors determine whether credit is useful or
Debt-Trap detrimental?
(Swapna's
Case) 1. Situation: Swapna, a small farmer, takes a loan from a moneylender
for cultivation expenses, hoping her harvest would help repay the loan.
2. Risk Realized: Midway through the season, the crop is hit by pests
and fails.
3. Outcome: Swapna is unable to repay the moneylender, and the debt
grows. She takes a fresh loan for next cultivation, but earnings are not
enough to cover the old loan. She is caught in debt and has to sell a
part of her land to pay off the debt.
4. Debt-Trap: This is an example of what is commonly called a
'debt-trap'. Credit, instead of helping Swapna improve her earnings,
leaves her worse off. Credit in this case pushes the borrower into a
situation from which recovery is very painful.
5. Factors Determining Impact: Whether credit would be useful or not
depends on the risks in the situation and whether there is some
support, in case of loss.
Terms of POSSIBLE QUESTION: What are the 'terms of credit'? Explain its
Credit key components like interest rate, collateral, and documentation.
1. Definition: Interest rate, collateral and documentation requirement,
and the mode of repayment together comprise what is called the terms
of credit.
2. Interest Rate: Every loan agreement specifies an interest rate which
the borrower must pay to the lender along with the repayment of the
principal.
3. Collateral (Security): Lenders may demand 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.
4. Lender's Right: If the borrower fails to repay the loan, the lender has
the right to sell the asset or collateral to obtain payment.<br>5.
5-Variation: 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.
Section 6: Formal vs. Informal Credit
Topic/Section Key Figure / (Points to Include)
Concept / Event
Formal vs. Informal Formal Sources POSSIBLE QUESTION: How does the RBI supervise the
Credit (Banks, formal sector?
Cooperatives)
1. Formal Sources: Loans from banks and cooperative societies.
2. RBI Supervision: The Reserve Bank of India (RBI) supervises
the functioning of formal sources of loans.
a. Cash Balance Monitoring: RBI monitors that banks maintain
cash balance (e.g., 5% of deposits).
b. Lending Targets: RBI sees that banks give loans not just to
profit-making businesses and traders but also to small cultivators,
small scale industries, to small borrowers etc.
c. Information Submission: Periodically, banks have to submit
information to the RBI on how much they are lending, to whom, at
what interest rate, etc.
3. Reasonable Interest Rates: Formal lenders charge lower and
reasonable interest rates.
Informal POSSIBLE QUESTION: Why do poor households in India often
Sources rely on informal sources of credit despite the high cost and
(Moneylenders, lack of regulation?
Traders, etc.)
1. Informal Sources: Moneylenders, traders, employers, relatives,
and friends.
2. No Supervision: There is no organisation which supervises the
credit activities of lenders in the informal sector. They can lend at
whatever interest rate they choose and there is no one to stop
them from using unfair means to get their money back.
3. High Interest Rates: Most informal lenders charge a much
higher interest on loans. Thus, the cost to the borrower of informal
loans is much higher.
4. Reasons for Reliance by Poor:
a. Accessibility: Banks are not present everywhere in rural India.
b. Difficulty in Accessing Formal Loans: Even where banks are
present, getting a loan from a bank is much more difficult as bank
loans require proper documents and collateral. Absence of
collateral is one of the major reasons.
c. Personal Knowledge/Flexibility: Informal lenders know the
borrowers personally and are often willing to give a loan without
collateral. Borrowers can, if necessary, approach them even
without repaying earlier loans.
Importance of POSSIBLE QUESTION: Explain why cheap and affordable
Cheap & credit is crucial for the country's development. What steps are
Affordable needed to achieve this?
Credit
1. Impact of High-Cost Credit:
-Higher cost of borrowing means a larger part of earnings is used
to repay the loan, leaving less income for borrowers.
-High interest rates can lead to increasing debt and debt trap, and
discourage new enterprises.
2. Need for More Formal Lending: Banks and cooperative
societies need to lend more, especially in rural areas, to reduce
dependence on informal sources of credit.
3. Equitable Distribution: It is necessary that formal credit is
distributed more equally, benefiting the poor who currently depend
on informal sources.
4. Crucial for Development: Cheap and affordable credit is
crucial for the country’s development. It leads to higher incomes
and enables people to borrow for various needs like growing
crops, doing business, setting up small-scale industries, or trade.
Section 7: Self-Help Groups (SHGs) for the Poor
Topic/Section Key Figure / (Points to Include)
Concept /
Event
Self-Help Groups Problem: POSSIBLE QUESTION: How do poor households face challenges
(SHGs) for the Poor Lack of in obtaining formal credit from banks?
Collateral
1. Poor households are still dependent on informal sources of credit.
2. Banks are not present everywhere in rural India.
3. Even when banks are present, getting a loan from a bank is much
more difficult than taking a loan from informal sources.
4. Bank loans require proper documents and collateral.
5. Absence of collateral is one of the major reasons which prevents the
poor from getting bank loans.
SHG POSSIBLE QUESTION: Describe the structure and functioning of
Formation & Self-Help Groups (SHGs). How do they help members access
Functioning loans?
1. Idea: To organise rural poor, in particular women, into small Self Help
Groups (SHGs) and pool (collect) their savings.
2. Structure: A typical SHG has 15-20 members, usually belonging to
one neighbourhood.
3. Savings: Members meet and save regularly. Saving per member
varies from Rs 25 to Rs 100 or more, depending on the ability of the
people to save.
4. Internal Loans: Members can take small loans from the group itself
to meet their needs. The group charges interest on these loans, but this
is still less than what the moneylender charges.
5. Decision Making: Most of the important decisions regarding the
savings and loan activities are taken by the group members. The group
decides on the purpose, amount, interest to be charged, repayment
schedule etc.
Bank POSSIBLE QUESTION: How do SHGs facilitate access to bank
Linkage & loans for the poor even without individual collateral? What are the
Benefits broader benefits of SHGs?
1. Eligibility for Bank Loans: After a year or two, if the group is
regular in savings, it becomes eligible for availing loan from the bank.
2. Overcoming Collateral Problem: Banks are willing to lend to the
poor women when organised in SHGs, even though they have no
collateral as such, because the group is responsible for the repayment
of the loan.
3. Group Accountability: Any case of non-repayment of loan by any
one member is followed up seriously by other members in the group.
4. Purpose of Loans: Loan is sanctioned in the name of the group and
is meant to create self-employment opportunities for the members (e.g.,
small loans for releasing mortgaged land, working capital, housing
materials, acquiring assets like sewing machine, cattle).
5. Broader Benefits:<br> a. Helps borrowers overcome the problem of
lack of collateral and get timely loans at a reasonable interest rate.<br>
b. SHGs are the building blocks of organisation of the rural poor.<br> c.
Helps women to become financially self-reliant.<br> d. Regular
meetings provide a platform to discuss and act on a variety of social
issues such as health, nutrition, domestic violence, etc.
Grameen POSSIBLE QUESTION: Discuss the Grameen Bank of Bangladesh
Bank as a successful example of providing credit to the poor,
(Example) highlighting its key features.<br>1. Success Story: Grameen Bank
of Bangladesh is one of the biggest success stories in reaching the
poor to meet their credit needs at reasonable rates.<br>2. Origin &
Reach: Started in the 1970s as a small project. In 2018, it had over 9
million members in about 81,600 villages spread across Bangladesh.
Almost all borrowers are women and belong to the poorest sections of
society.<br>3. Proof of Concept: These borrowers have proved that
not only are poor women reliable borrowers, but that they can start and
run a variety of small income-generating activities successfully.<br>4.
Key Features:<br> a. No Collateral Needed: Unlike regular banks,
Grameen Bank didn’t require any collateral for loans, which was crucial
for the poor who often didn't own property.<br> b. Building Trust: Built
trust by lending to a few people initially; if they repaid on time, they
received more loans.<br> c. Solidarity Groups: Introduced "solidarity
groups" (around five people from the same village). Other group
members became responsible for ensuring a person repaid their loan,
creating strong accountability and support.<br>5. Vision (Professor
Muhammad Yunus): "If credit can be made available to the poor
people on terms and conditions that are appropriate and reasonable
these millions of small people with their millions of small pursuits can
add up to create the biggest development wonder."
