Money and Credit

Barter and money, modern forms of money, how banks link savers and borrowers, terms of credit, formal and informal loans, and self-help groups.

Key ideas

• Barter needs a double coincidence of wants; money removes that need by acting as a medium of exchange.
• Modern money is currency, issued by the RBI, and bank deposits, which can be withdrawn on demand, for example by cheque.
• Banks keep only a small part of deposits as cash and lend the rest at a higher interest rate.
• Terms of credit are the interest rate, collateral, documents and the mode of repayment.
• Formal lenders (banks, cooperatives) are supervised by the RBI and charge less; informal lenders (moneylenders, traders, relatives) often charge much more.
• Credit helps when the loan earns more than it costs, but can push a borrower into a debt trap when things go wrong.
• Self-help groups of about 15–20 people, mostly women, save together and lend to members without collateral.

Remember

Watch out

• Mixing a monthly rate with a yearly one: 5% a month is 60% a year.
• Thinking banks keep all their deposits as cash.
• Calling a moneylender a formal source of credit.

Worked example