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Money
Money can be defined as anything that act as medium of exchange, store of value and unit of accounting to facilitate the economic activities and transactions. E.g. Currency – paper notes and coins, Demand Deposits, Bankers Cheque.
Barter system and the need of money

• In barter system goods are directly exchanged with goods to complete the mutual needs.
• E.g. Shoemaker exchanges a pair of manufactured shoes to the farmer for some quantity of wheat.

This system has several drawbacks.

1. Double coincidence of wants is essential
2. Store of Value
3. Deferred Payments
4. Unit of Accounting

Forms of Money
Old forms of money

• Grains and cattle
• Metallic coins of gold, silver, copper.

Modern forms of money

• Currency
• Deposits with bank
• Cheque

Loan activities of the bank –

• Bank mediates between those who has surplus amount and those who need money.
• Bank accepts deposits from the bank account holders who have excess amount.
• Bank stores small portion of this amount as a provision for users who wish to withdraw money.
• Currently in India this is around 15% of the total amount.
• The major portion of the money is offered as a loan to those who need money.
• Loan is an amount given by bank in which bank provide money to the needy with an assurance to pay the amount with the extra amount charged as an interest.
• A person who deposits the amount in the bank account called as depositor.
• A person who borrows money from the bank is called a borrower.
• The rate of interest on loan is higher than the rate of interest banks offer on the deposits.
• The difference between the amounts earned from borrowers to the amount given to  depositor is the main source of income for any bank.

Credit

• Credit is an agreement in which lender supplies the borrower with the money, goods or services in return for the promise of future payments.
• E.g. 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.
• In the second scenario 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

• While giving the loan the lender has to check for security of future payment for that he signs an agreement with the borrower which specifies terms of credit.
• An Agreement consists of interest rate, collateral security, documentation and mode of repayment. These are called as terms of credit.
• In case if the borrower fails to repay the loan, the lender has right to obtain his amount by selling the collateral.
• Terms of credit may vary from one credit arrangement to another. They may vary depending on the nature of the lender and borrower.

Sources of Credit

• Moneylender and local traders
• Banks
• Cooperatives
• Other sources like relatives, friends etc.

Formal and Informal sources of Credit
The sources of credit are categorised as formal and informal sources of credit.
Reserve Bank of India 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 seek information regarding how much money a bank is lending, to whom, at what interest rate etc. and make sure that bank give loans to every category of the peoples though profit making business or a farmer.
Functions of RBI

• Issue currency on Behalf of central government.
• Regulation of money and credit.
• Keep track on working of other commercial banks.
• RBI facilitates all the banking activities for the central and state government

SHG (Self Help Group)
A SHG is a group of 15-20 members usually from the same locality, who saves their money depending on the ability of the person to save. Any member of the group can take loan from the SHG at an interest rate which is small than what moneylender charges. In one or two years the group become eligible to take loan from the bank. The loan is sanctioned in the name of the group.
Summary
Money is the medium of exchange that eliminates the need for barter system. Money has several advantages as a medium of exchange those are avoiding the problem of double coincidence, Store of value, Differed payments, unit of accounting. Old forms of money are grains, gold and copper coins. Modern form of money are currency, deposit in a bank, demand deposits, cheque etc. To meet the present need of money people often take loan from various sources such as banks, cooperatives, moneylenders, friends and relatives. Banks keeps small portion of the deposit as a cash and give the major part as loan to the borrowers. Banks are used to deposit user cash or to lend the money as a loan. Bank gives interest to the depositors on their money and charges interest to borrowers. The interest rate for borrowers is higher than the depositors thus the amount obtained from interest earned minus interest given is the main source of income for any bank. Credit is an agreement that give right to moneylender that he can sell borrowers collateral to obtain his money. Credit is essential part for any business so as to meet the present need of capital. Credit vary substantially between formal and informal sources. At present rich people receive credit from formal sources while poor get credit from informal sources of credit. To make balance between rich and the poor, the poor people should get credit from formal sources such as banks, cooperative societies etc.