Class 10 Economics Chapter 3 Money and Credit
Credit is an agreement in which lender supplies the borrower with money, goods or services in return for the promise of future payments. Generally, credit is taken to meet working capital needs of business. However, credit can play positive as well as negative roles in some situation.
For example: Shoe manufacturer receives an order or 3000 pair of shoes to be delivered in a month. To complete the order he need resources such as workers, raw material. He asks raw material supplier to supply raw material now and promises to pay him later. He then obtains loan in cash as an advanced payment from the person who gave the order. This way he have solved his present working capital needs. At the end of the month he is able to complete the order and earn money.
Let’s take another case, a farmer took loan from a moneylender to meet expense of crop cultivation. Due to bad weather crop fails. The farmer is not able to repay the loan. Over year the loan grows to a large amount. This situation is called debt trap. The farmer is now caught in the debt trap and to pay off the debt farmer has to sell some of his land. In this case the credit creates negative impact on the business.
Terms of credit
An agreement must be signed with borrower taking loan to check security for future payments. Agreement consist of interest rate, collateral security, documentation and mode of repayment. These are called s terms of credit. If borrower fails to repay the loan, the lender has right to obtain the amount by selling collateral. Terms of credit varies from credit arrangement, from nature of lender and borrower.
Sources of credit
- Money lenders and local traders: This is generally seen in village areas. generally money lenders and local traders take advantage of illiteracy of village people, thereby charging high interest rates. Besides they also make farmers to sell the crop to them. Hence, they purchase crop at very low rate and sell them when price increases to gain extra benefit.
- Banks: Banks provide low interest than moneylenders, but the borrowers has to sign terms of credit before taking the loan. There are people who have no home land or any collateral, hence, for such people it become difficult to take credit.
- Cooperative: these accepts deposits from its members and then gathered amount is deposited in bank with which they can obtain loan. Amount in the bank works as collateral for them.
Formal and Informal sources of credit
- Formal credit: Reserve bank of India(RBI) is India’s central banking institution that supervises the functioning of formal sources of credit. RBI monitors the banks in actually maintaining the cash balance. RBI also finds information regarding how much money is lending, to whom, at what interest. It makes sure that bank give loan to each and every category of people either business or a farmer.
- Informal credit: It includes money lenders. Moneylenders can lend money at any interest they want. There are no rules and regulations in informal sector. If loan is taken, from these resources and if the earning is less then, large amount of earning is used to repay the loan with its interest.
Functions of RBI
- Issue currency on Behalf of Central government.
- Regulation of money and credit.
- Keep track on working of other commercial banks.
- It facilitates all banking activities for central and state government.
Keywords: Reserve bank of India, Formal credit, Informal credit
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