MONEY AND CREDIT
Class 10 | RBSE & CBSE Board Exam 2026
Complete Wikipedia-Style Notes | Marwari Mission 100™
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📋 Table of Contents
1. Introduction to Money
Money is anything that is generally accepted as a medium of exchange and measure of value. In our daily life, we use money for buying goods and services, paying bills, and saving for the future.
📘 Definition: Money
Money is anything that is generally accepted as a medium of exchange, a measure of value, a store of value, and a standard of deferred payment. In India, the Reserve Bank of India (RBI) issues currency notes on behalf of the Central Government.
Functions of Money:
- Medium of Exchange: Used to buy and sell goods and services
- Measure of Value: Helps to measure the value of goods (price)
- Store of Value: Can be saved for future use
- Standard of Deferred Payment: Used for future payments (loans, credit)
2. Barter System and its Limitations
📘 Definition: Barter System
Barter System is a system of exchange where goods are directly exchanged for other goods without using money. It was used before the invention of money.
Example: A farmer exchanges wheat for cloth from a weaver.
Double Coincidence of Wants:
📘 Definition: Double Coincidence of Wants
Double Coincidence of Wants means that when a person wants to exchange something, he must find another person who not only wants what he has but also has what he wants.
Example: A shoe maker wants rice. He must find a rice seller who wants shoes. This is very difficult!
Limitations of Barter System:
| Problem | Explanation |
|---|---|
| Double Coincidence of Wants | Difficult to find a person who wants what you have and has what you want |
| Lack of Common Measure | No standard way to measure the value of goods |
| Difficulty in Storing Value | Perishable goods (like fruits) cannot be stored for long |
| Indivisibility of Goods | Cannot divide a cow to buy a small item |
| Difficulty in Transfer | Hard to carry heavy goods for exchange |
💡 How Money Solved These Problems
Money eliminated the need for double coincidence of wants. With money, a shoe maker can sell shoes to anyone for money and then use that money to buy rice from anyone else. Money acts as an intermediate in the exchange.
3. Modern Forms of Money
In the modern economy, money takes various forms. The two main forms of modern money in India are Currency (paper notes and coins) and Deposits with Banks.
3.1 Currency (Paper Notes and Coins)
📘 Key Facts about Currency in India
- RBI (Reserve Bank of India) issues currency notes on behalf of the Central Government
- Currency is authorized by the government of the country
- It is called Fiat Money (legal tender)
- No one can refuse to accept currency
- Rupee is used as medium of exchange in India
3.2 Deposits with Banks
People deposit their extra money in banks. This money can be withdrawn on demand through cheques or ATM cards. These deposits are called Demand Deposits.
📘 Definition: Demand Deposits
Demand Deposits are deposits in a bank account that can be withdrawn on demand at any time by the account holder. They are considered as money because they can be used for payment through cheques.
3.3 Cheque
📘 Definition: Cheque
A Cheque is a paper instructing the bank to pay a specific amount from the person's account to the person in whose name the cheque has been issued.
Parties: Drawer (who writes cheque), Drawee (bank), Payee (who receives money)
Currency
Paper notes & Coins
Demand Deposits
Bank account money
Cheque
Payment instruction
4. Banks and Deposits
Banks accept deposits from the public and use a major portion of these deposits to give loans. This is how banks earn profit - by charging higher interest on loans than what they pay on deposits.
How Banks Work:
| Step | Process |
|---|---|
| 1 | People deposit money in banks (Savings/Current Account) |
| 2 | Banks pay interest on deposits (e.g., 4% per year) |
| 3 | Banks keep only 15% as reserve (Cash Reserve) |
| 4 | Banks give 85% deposits as loans to borrowers |
| 5 | Banks charge higher interest on loans (e.g., 10% per year) |
| 6 | Bank's Profit = Interest earned on loans - Interest paid on deposits |
💡 Important: Cash Reserve
Banks keep only about 15% of deposits as cash reserve because on any given day, only some depositors come to withdraw cash. Banks use the remaining amount to give loans and earn interest.
5. Credit and its Role
📘 Definition: Credit (Loan)
Credit refers to an agreement in which a lender supplies money, goods or services to a borrower in return for a promise of future payment with interest.
Two Faces of Credit:
Credit can play both positive and negative roles in a person's life, depending on the situation.
✅ Positive Role of Credit
Example: A farmer Salim takes loan of ₹3 lakhs for farming
- Gets good crop yield
- Sells crop at good price
- Repays loan with profit
- Credit helps in increasing income
Result: Better situation than before!
❌ Negative Role of Credit (Debt Trap)
Example: A farmer Swapna takes loan of ₹3 lakhs
- Crop fails due to drought
- Cannot repay the loan
- Takes another loan to repay first
- Falls into debt trap
Result: Worse situation - Debt Trap!
📘 Definition: Debt Trap
Debt Trap is a situation where a borrower is unable to repay the loan and falls into a cycle of taking new loans to pay old ones. The debt keeps increasing and the person becomes poorer.
6. Terms of Credit
Every loan agreement has certain conditions called Terms of Credit. These include interest rate, collateral, documentation, and mode of repayment.
Components of Terms of Credit:
| Term | Meaning | Example |
|---|---|---|
| Interest Rate | Extra amount paid for using the loan | 10% per year |
| Collateral | Asset given as security against the loan | Land, house, vehicle, gold |
| Documentation | Papers required for loan | ID proof, income proof |
| Mode of Repayment | How the loan will be repaid | Monthly EMI, lump sum |
📘 Definition: Collateral
Collateral is an asset that the borrower owns (such as land, building, vehicle, livestock, deposits with banks) and uses as a guarantee to a lender until the loan is repaid. If the borrower fails to repay, the lender has the right to sell the collateral to recover the loan.
7. Formal Sector Credit
📘 Definition: Formal Sector of Credit
Formal Sector includes loans from banks and cooperatives. They are supervised by the Reserve Bank of India (RBI). They follow rules set by the government.
Sources of Formal Credit:
- Commercial Banks: SBI, PNB, HDFC, ICICI, etc.
- Cooperative Banks: Agricultural cooperatives, Urban cooperatives
- Regional Rural Banks (RRBs): For rural areas
- NABARD: National Bank for Agriculture and Rural Development
Features of Formal Sector:
Supervised by RBI
Low Interest Rate (10-15%)
Proper Documentation
Collateral Required
🏛️ Role of RBI
- RBI monitors that banks maintain minimum cash balance
- RBI ensures banks give loans to small farmers, small industries, not just profit-making businesses
- RBI checks that banks charge reasonable interest rates
- Periodically takes information from banks about lending
8. Informal Sector Credit
📘 Definition: Informal Sector of Credit
Informal Sector includes moneylenders, traders, employers, relatives, friends, etc. They are NOT supervised by any organization. They can charge any interest rate and use unfair means.
Sources of Informal Credit:
- Moneylenders: Local lenders in villages (Sahukar)
- Traders: Give loans against crops
- Employers: Give advance salary
- Relatives and Friends: Personal loans
- Chit Funds: Informal saving groups
Comparison: Formal vs Informal Sector
| Basis | Formal Sector | Informal Sector |
|---|---|---|
| Sources | Banks, Cooperatives | Moneylenders, Traders, Friends |
| Supervision | By RBI | No supervision |
| Interest Rate | Low (10-15%) | Very High (36-60%+) |
| Collateral | Required | May or may not |
| Documentation | Proper papers needed | Little or no papers |
| Availability | Takes time | Quick and easy |
| Share in Rural Credit | ~50% | ~50% |
⚠️ Problem with Informal Credit
About 85% of loans from informal sector carry interest rates higher than 36% per year. Poor people often fall into debt trap because of high interest rates charged by moneylenders.
9. Self-Help Groups (SHGs)
📘 Definition: Self-Help Group (SHG)
Self-Help Group (SHG) is a small group of 15-20 members (usually poor women) who pool their savings and give small loans to members at reasonable interest rates. It provides collateral-free loans to poor people.
How SHG Works:
| Step | Process |
|---|---|
| 1 | 15-20 members (mostly women) form a group |
| 2 | Members save small amounts regularly (₹25-100/month) |
| 3 | Pooled savings are given as small loans to members |
| 4 | After 1-2 years of regular saving, SHG becomes eligible for bank loan |
| 5 | Bank gives loan to SHG (without collateral) in the name of group |
| 6 | SHG decides which member gets loan and at what interest rate |
Benefits of SHGs:
- No Collateral Required: Poor people can get loans without assets
- Low Interest Rate: Much lower than moneylenders
- Timely Availability: Quick and easy loans for emergencies
- Women Empowerment: Women become financially independent
- Self-Employment: Members can start small businesses
- Discussion Platform: Members discuss social issues (health, education)
📌 Grameen Bank of Bangladesh
Grameen Bank was started by Professor Muhammad Yunus in Bangladesh in 1976. It gives small loans (microcredit) to poor people without collateral. This model has been replicated worldwide. Yunus received Nobel Peace Prize in 2006 for this work.
🎯 Key Points for Board Exam
- Money = Medium of exchange, measure of value, store of value
- RBI issues currency notes in India
- Barter System = Exchange of goods for goods (no money)
- Double Coincidence of Wants = Main problem of barter system
- Demand Deposits = Bank deposits that can be withdrawn on demand
- Cheque = Paper instructing bank to pay a specific amount
- Banks keep only 15% as cash reserve, lend rest as loans
- Collateral = Asset given as security for loan
- Formal Sector = Banks, Cooperatives (supervised by RBI)
- Informal Sector = Moneylenders, Traders (no supervision, high interest)
- Informal sector charges 36-60%+ interest (very high)
- SHG = Self-Help Group (15-20 women, pool savings, give loans)
- Grameen Bank = Founded by Muhammad Yunus (Nobel Prize 2006)
- Debt Trap = Cycle of taking new loans to pay old ones
📝 Important Questions
1 Mark Questions (MCQ/Very Short):
Q1. Who issues currency notes in India?
Ans: Reserve Bank of India (RBI)
Q2. What is collateral?
Ans: Asset given as security/guarantee against a loan
Q3. What percentage of deposits do banks keep as cash reserve?
Ans: About 15%
Q4. Who founded Grameen Bank?
Ans: Professor Muhammad Yunus (Nobel Prize 2006)
3 Mark Questions (Short Answer):
Q5. What is Double Coincidence of Wants? How does money solve this problem?
Ans: Double Coincidence of Wants means that a person who wants to exchange something must find another person who wants what he has AND has what he wants. This is difficult in barter system. Money solves this by acting as intermediate - one can sell goods for money and use that money to buy anything from anyone.
Q6. What are the terms of credit?
Ans: Terms of credit are conditions under which a loan is given: (1) Interest Rate - extra amount paid for loan, (2) Collateral - asset given as security, (3) Documentation - papers required, (4) Mode of Repayment - how loan will be repaid (EMI, lump sum).
5 Mark Questions (Long Answer):
Q7. Explain the differences between formal and informal sources of credit.
Ans: (1) Sources: Formal = Banks, Cooperatives; Informal = Moneylenders, Traders. (2) Supervision: Formal = RBI supervises; Informal = No supervision. (3) Interest Rate: Formal = Low (10-15%); Informal = Very high (36%+). (4) Collateral: Formal = Required; Informal = May not be needed. (5) Documentation: Formal = Proper papers; Informal = Little or no papers.
Q8. What are Self-Help Groups? How do they help the poor?
Ans: SHG is a group of 15-20 members (usually poor women) who pool savings and give loans to members. Benefits: (1) No collateral required (2) Low interest rate (3) Quick loans for emergencies (4) Women empowerment (5) Self-employment opportunities (6) Platform to discuss social issues. After regular saving, SHGs can get bank loans without collateral.
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