Money as a Medium of Exchange:

  • Transactions in Money: Money plays a crucial role in our daily life. People use money to buy goods (like shoes) or services (like hiring a plumber). Sometimes, there’s no immediate exchange of money, but a promise to pay later, such as credit.
  • Why Use Money?: The primary reason people use money is that it is a convenient medium of exchange. For example, if a shoe manufacturer wants wheat, he first sells his shoes for money and then uses that money to buy wheat. This is much easier than bartering, where he would have to find someone who wants shoes and also has wheat to offer. This process is called double coincidence of wants, meaning both parties must have what the other needs, which makes bartering difficult.
  • Barter vs. Money: In a barter system, there’s a direct exchange of goods, but both parties must agree on the exchange. With money, this intermediate step is eliminated, making transactions easier.

History of Money:

  • Early Forms of Money: Before coins were introduced, things like grains and cattle were used as money in India. Later, metallic coins made from gold, silver, or copper were used. Today, paper notes and coins (currency) are the common forms of money.
  • Modern Currency: Modern currency, like paper notes and coins, is not made of precious metals. It has no intrinsic value but is accepted because the government authorizes it. In India, the Reserve Bank of India issues currency, and it is illegal for anyone else to issue money.

Bank Deposits:

  • Deposits in Banks: People often keep their money in banks. For example, a worker might deposit their salary at the start of the month. Banks pay interest on these deposits and allow people to withdraw money when needed. These deposits are called demand deposits because they can be withdrawn on demand.
  • Cheques: A cheque is an instruction to a bank to transfer money from one account to another. It allows people to make payments without using physical cash.

Role of Banks:

  • Banks and Loans: Banks don’t keep all deposits as cash. They lend out a significant portion of deposits to borrowers. Banks earn money by charging a higher interest rate on loans than they pay on deposits. This process helps in economic growth by allowing borrowers to use the funds for business or personal needs.
  • Loan Examples:
    • Salim’s Loan: Salim, a shoe manufacturer, might take loans to fund production. He may ask a leather supplier to deliver materials and promise to pay later, or take an advance payment from a buyer. By selling his shoes, Salim repays the loans with profit.
    • Swapna’s Loan: Swapna, a farmer, takes a loan for her crops but faces a poor harvest due to pests. Unable to repay, she ends up in a debt trap, where her debt grows, and she is forced to sell her land.

Credit and Debt Trap:

  • Credit: Credit means borrowing money, goods, or services with a promise to repay later. For businesses like Salim’s, credit can help with short-term expenses and boost production.
  • Debt Trap: In cases like Swapna’s, credit can be harmful if things go wrong (e.g., poor crop yield). She’s unable to repay the loan, and her debt increases. This is called a debt trap, where credit worsens the borrower’s financial situation.

Collateral and Terms of Credit:

  • Collateral: When taking loans, a borrower may need to provide collateral, like land or a house. This is a guarantee for the lender that if the borrower fails to repay, the lender can sell the collateral to recover the loan amount.
  • Terms of Credit: These are the conditions of a loan, including the interest rate, collateral, and repayment schedule. For example, Megha takes a loan from the bank to buy a house. She has to repay it over 10 years with monthly installments, and the house papers are held by the bank as collateral.

Variety of Credit Arrangements” with Extra Knowledge for Competitive Exams

1. Sources of Credit in Sonpur

  • Formal Sector Credit:
    • Banks: Arun received a loan from a bank, with an 8.5% annual interest rate. He can repay after three years and uses his crop as collateral.
    • Cooperatives: The Krishak Cooperative offers low-interest loans to farmers for various purposes, like buying equipment, housing, or cultivation.
  • Informal Sector Credit:
    • Moneylenders: Charge high-interest rates, often leading to debt traps.
    • Landowners: Provide credit to landless workers like Rama, who has to repay by working for them at a rate of 5% per month.
    • Traders, relatives, and friends: Also play a role in providing informal credit.

2. Uses of Credit in Sonpur

  • Farmers use credit for cultivation, purchasing agricultural tools, and dealing with unexpected expenses.
  • Laborers like Rama borrow to meet daily needs or pay for emergencies like medical bills or family functions.
  • Cooperatives offer loans for various purposes, including farming, business, and housing.
  • Debt Traps: High-interest loans from informal sources (like landowners and moneylenders) often keep borrowers in a cycle of debt.

3. Comparison of Terms of Credit

  • Small Farmers (e.g., Shyamal): Likely lack access to bank loans and depend on informal credit, leading to higher costs and unfavorable terms.
  • Medium Farmers (e.g., Arun): Access to bank loans with lower interest rates (8.5%) and the option to use stored crops as collateral.
  • Landless Agricultural Workers (e.g., Rama): Dependent on high-interest loans from employers or moneylenders, leading to increasing debt.

4. Why Arun’s Income is Higher than Shyamal’s

  • Arun has access to formal credit at lower interest rates, allowing him to invest in better cultivation practices and increase his productivity. Shyamal, being a small farmer, lacks access to such credit and is likely trapped in informal lending with higher costs.

5. Availability of Cheap Credit

  • Not everyone in Sonpur can access cheap credit. Richer households and those with assets like land can secure loans at lower interest rates, while poorer households depend on informal sources with high-interest rates.

6. Bank Loan Accessibility

  • Arun’s Access to Bank Loan: He has land as collateral and a formal relationship with the bank. Other villagers might prefer informal lenders because banks require collateral, which many don’t have.

7. Formal vs. Informal Credit

  • Formal Credit: Provided by institutions like banks and cooperatives. It is regulated and offers lower interest rates but requires documentation and collateral.
  • Informal Credit: Provided by moneylenders, traders, and landowners, often at much higher interest rates and with fewer formalities. It can be exploitative, leading to debt traps.
  • Impact on Borrowers: Informal loans are more expensive, leading to lower disposable income for borrowers. If not paid on time, the borrower can enter a debt trap.

8. Why Some People Struggle to Get Formal Loans

  • Collateral Requirements: Poor people often lack assets to offer as collateral, making it difficult for them to access formal loans.
  • Banking Infrastructure: Banks are not always present in rural areas, and when they are, the loan application process can be complex and difficult for the poor.

9. Self-Help Groups (SHGs) for the Poor

  • Concept: SHGs are small groups of 15-20 people who pool their savings and provide loans to members at a lower interest rate than moneylenders.
  • Advantages: Helps the poor, especially women, get credit without collateral, promotes regular savings, and encourages repayment discipline within the group.
  • Bank Loans for SHGs: If SHGs maintain regular savings, they can access loans from banks to fund income-generating activities.
  • Social Benefits: SHGs also serve as platforms for social issues like health, nutrition, and domestic violence.

10. Formal vs. Informal Sector Credit

  • Graph 1: Shows that the informal sector provides more credit to rural households (especially the poor) than the formal sector. Informal lenders charge much higher interest, making it difficult for borrowers to improve their incomes.
  • Graph 2: Highlights that wealthier households in urban and rural areas use formal credit sources more, while poorer households rely on informal sources.

11. The Role of the Reserve Bank of India (RBI)

  • RBI’s Role: Supervises formal sector credit to ensure it’s offered under fair conditions, monitors the lending rates of banks, and ensures that credit is accessible to small farmers and businesses.
  • Challenges with Informal Credit: There’s no supervision for informal lenders, leading to exploitative practices like excessive interest rates and unfair repayment demands.

12. Importance of Expanding Formal Credit

  • To reduce dependence on informal credit, it’s important to expand access to formal credit (from banks and cooperatives) so that the poor can get loans at reasonable interest rates and use them to improve their livelihoods and start businesses.

13. Development through Credit

  • Affordable credit helps people grow crops, set up businesses, and invest in small-scale industries. It plays a crucial role in economic development by providing the necessary funds for income-generating activities.

THESE ALL ARE THE NOTES OF CHAPTER 3 POLITICAL SCIENCE. AND AFTER SOME TIME YOU GET IMPORTANT QUESTIONS HERE. *#THANKS FOR VISITING, VISIT AGAIN#* 😊