SUPPORT STUDY MATERIAL

Money and financial system

Barter system : It is a system where goods are exchange with the goods. It suffers from many difficulty

Double coincidence of want :

Barter system can only work when both the persons are ready to exchange each other’s good the situation in which both the persons are ready to sell and buy each other’ commodity is as double coincidence of wants

For example : when the farmer wants cloth against his surplus wheat but the weaver does want to have wheat against his surplus cloth or the farmer doesn’t want to have clothe in exchange of wheat therefore the barter exchange is not possible .

Money : Money is anything which is accepted as a medium of exchange ,measure of value, store of value and can be used for standard of deferred payment.

Modern form of money :

Currency : currency includes coin and paper notes

Coins are made up of some metal, hence they are called metallic coins ,modern currency notes are not made of valuable metals like gold and silver .

The currency notes are accepted as a medium of exchange because of the reason that they are authorized by the government of the country, it was written on the note that I promise the bearer to pay a some of rupee ten

In every country the issue of currency is either in the hands of central government or in the hands of central bank . In India ,the issue of currency notes is the monopoly of the RBI

The currency notes are unlimited legal tender money .It means they can be paid to any extent in settling transaction in India. Nobody Can refuse the payment made in rupees.

2.Bank money or deposit with banks:

Bank money refers to bank deposit by the public with the banks  which they can withdraw at any time they like .The deposit in the bank accounts, that can be withdrawn on demand, are called demand deposits These demand deposit can be transferred to another person through a bank Cheque

3. 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 made

      The Cheque itself is not money but it perform the same function as money, hence bank cheques are considered as bank money.

Loan advance activity :

In general Banks performs two function that is accepting deposit and advancing loan .

Procedure : We know that people deposit their surplus cash money with the banks. This we call as bank deposit . Banks know that all the depositors do not demand all the money at the same time .

If all the depositors approach together then also they will not withdraw their whole amount , and if they withdraw their whole amount then the bank will be in trouble

Banks keeps a certain proportion of their bank deposit in the form of cash with RBI which is known as CRR (cash reserve ratio)In India it is 15%of their deposit and the proportion of their deposit which they keep with themselves is known as SLR (statutory liquidity ratio) , this cash is used by the bank to manage the demands of the people on particular day. Loan is given to all types of people such as businessmen , farmers consumers and employers etc.

Banks in this way act as mediator between depositors who have surplus funds and the borrowers who are in need of funds

Banks pay interest to the depositors and charge interest from the borrower Normally interest rater charged from the borrower is high and interest given on deposit is low .The difference is the main source of income for the bank.

Examples of credit :

Credit(loan) refers to an agreement in which the lender supplies the borrower with money ,goods or services and the borrower promises for future payment  when  a person take credit ,how does it affect him.

Purpose of credit : Money may be borrowed to purchase fixed capital asset for use in a production enterprise.

Households may borrow  money to acquire some durable consumer goods

In agriculture, farmer generally require crop loan ,farmers borrow at the beginning of the farming season and repay the loan after the harvest.

credit may be helpful or harmful depending upon the situation

1.     If a loan has been taken for increasing production and the money is effectively utilized, the loan create its own means of payment that is the borrower can easily repay the loan

2.     But ,if a borrower misutilises the borrowed money and fails to repay the loan he will find himself in trouble, as a result fresh loan may be required to repay the previous loan, and the borrower may find himself caught in a vicious circle or debt trap in which loan is taken to repay the earlier loan

3.     Terms of credit : When a borrower takes credit(loan)from a creditor ,he has to pay a specified rate of interest along with the repayment of principal amount . Loans may be granted on security or with without security . Normally lenders demand collateral (security )against loans in order to safeguard their money,  mode of repayment that is monthly, half yearly or yearly and

4.         document requirement .

5.     Collateral :  It means an asset that the borrower owns(such as land ,building ,vehicle ,livestock stock of the goods ,bank deposit etc.) and uses it as a guarantee to a lender .It remains under the custody of lender until the loan is repaid.

6.     If the borrower fails to repay the loan, then lender has the right to get the money by selling the asset of the borrower .

7.     Example of house loan

Financial institution for credit or sources of credit

There are two main categories of credit arrangements

1.     Formal institutions of credit:  it includes cooperatives ,regional  rural banks and commercial banks loan given by such institution are termed as formal sector loan

      (a) Cooperative credit societies : it provides short term and long term loan to farmers and artisans. The guiding principles of cooperatives are voluntary and open membership, democratic control and equitable distribution of profit and utilization of resources

      (b)Banks :  there are many commercial banks which lends funds to industry , businessmen and farmers after the nationalization of banks there was a radical change in the credit  policy

       (c) Regional rural banks : Initiated in 1975 the main aim is to extend credit to small and marginal farmers and rural artisans to save them from the clutches of moneylenders

       (d) NABARD (national bank for agriculture and rural development) : set up in 1982 for better coordination among the various agencies of rural credit it is apex bank for rural credit.

2.Informal arrangement for credit: to meet  the credit requirements ,especially of rural people such as farmers and artisans in India , informal arrangement had always occupied an imp0rtant place . They include money-lender , landlords ,traders and commission agents ,relative and friends etc. Loan given by these informal lenders are termed as informal sector loans.

All such informal lenders exploit the borrowers and indulge in various malpractices .

They charge exorbitant rates of interests, they manipulate accounts to their advantage , they force the farmers to sell their agricultural produce to them at low price, They obtain bonds and promissory notes on false pretence , they give no receipts for repayments and often deny such repayment

 Sources of credit for rural households in india

In the total credit to rural households the share of formal sector is 52% and the share of informal sector is 48% It shows that even today informal sector lending occupies a prominent place in the rural household lending

Among the informal sector lenders, the largest share is of moneylenders 30%

Share of formal and informal sources of credit in urban areas

The poor households in urban areas receive 85% loan from the informal sources of credit while they get only 15%loan from the formal sources

On the other hand rich households receive 90% loan from formal sources and only 10% from informal sources

 Difference

In India, reserve bank of India supervises ,regulates and controls the activities of formal sector financial institutions RBI direct the banks to maintain a minimum percentage of their deposit

All the banks are required to submit report to the RBI on how much they are lending ,to whom and at what rate of interest  and on such report RBI can direct the bank to change their policies

On the other hand there is no supervising agency which can control the activities of the informal sectors lenders.they charge high rate of interest beside this there is no one who can stop them to use unfair means to get their money back

The cost of borrowing is high as a result a large part of the income is used for the payment

Some times the amount to be repaid become greater than the in come of the borrower .This result in debt-trap for the borrower

SELF HELP GROUP (SHG)

Poor people are dependent on informal sources because:

Banks branches are not preset everywhere in rural India

There are large number of formalities for availing bank credit

Banks generally insist on collateral security which poor are not in a position to offer

Informal moneylenders know the borrowers personally and  are ever ready to advances loans to the rural poor . However , the interest charged by them is exorbitant , no record of repayment is kept, and they even use muscle power to get their loan repaid

Self Help Group:

In rural area poor people particularly women have devised a new way  to get money at reasonable terms They form a group of 10-15 members called self help group . All the members know each other very well

They make saving  of Rs 50 to Rs 150 or more as per convenience ,members can take loan from this group at affordable rate of interest

If the group is regular in its savings ,it can approach a bank for availing a loan .Bank do sanction loans in the name of SHG

Small loan are provided to the members of group for meeting their needs like buying seeds, fertilisers,raw material etc

All the member of the group take joint decision like savings and activities to be taken up by loan amount

It has opened the doors for self employment