Chapter – 3

Money and Credit

In this post we have given the detailed notes of class 10 Social Science (Economics) chapter 3 Money and Credit in English. These notes are useful for the students who are going to appear in class 10 board exams.

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Chapter 3, Money and Credit

The Role of Money

Most of the transactions we make in our day-to-day lives involve the use of money. A worker is paid wages in money, a shopkeeper sells goods for money, and a family uses money to meet its needs. But this was not always the case — before money came into use, exchange took place through the Barter System, where goods were directly exchanged for other goods.

The Barter System and the Double Coincidence of Wants

Barter System: A system of exchange in which goods are directly exchanged for other goods, without the use of money.

The main problem with the barter system was what economists call the Double Coincidence of Wants.

Double Coincidence of Wants: This means that for a barter exchange to take place, what one person wants to sell must be exactly what the other person wants to buy, and at the same time, what the second person wants to sell must be exactly what the first person wants to buy. For example, if a farmer has wheat and wants shoes, he must find someone who has shoes and wants wheat in exchange. Such a coincidence of wants was difficult to find and made trade slow, limited, and inconvenient.

How Money Solves This Problem

Money acts as an intermediary in the process of exchange — this is why it is called the Medium of Exchange. Since money is accepted as a medium of exchange, it eliminates the need for a double coincidence of wants. A person can now sell a good for money and use that same money to buy any other good they require. In this way, money separates the act of selling from the act of buying, removing the constraints of the barter system and making trade far easier.

Modern Forms of Money

In modern economies, money mainly exists in two forms — currency (coins and notes) and demand deposits with banks.

Currency — Coins and Paper Notes

• Coins: Metal money used mainly for transactions of smaller value.
• Paper Notes: Currency printed on paper, which forms the main medium of transactions today.

An important feature of modern currency is that it is not of much use on its own — a ₹100 note cannot be eaten or worn — yet everyone accepts it in exchange for goods and services because the government has authorised it as money.

The Authority to Issue Currency in India — Reserve Bank of India (RBI)

In India, currency notes are issued by the Reserve Bank of India (RBI) on behalf of the Central Government. No other individual or organisation is allowed to issue currency under Indian law. As per Indian law, no one can legally refuse to accept payment made in the form of these notes for settling a transaction.

Why is money accepted as a medium of exchange? Money is accepted as a medium of exchange because the government has authorised it as currency. In India, only the currency issued by the RBI has legal sanction, and that is why every person accepts it as a means of payment.

Deposits with Banks and Other Forms of Money

People usually keep a large part of their savings as deposits in banks, since it is safe there and also earns interest. Depositors can withdraw the money whenever they require it — this is why such deposits are called Demand Deposits. Banks also give depositors the facility of cheques, using which a person can make payments without directly using cash. Since demand deposits can also be used to settle transactions, they are considered a form of money as well.

Credit (Loan) and the Loan Agreement

Credit: Credit refers to an agreement in which the lender supplies the borrower with money, goods, or services in return for a promise of future payment.

Every loan agreement is based on certain conditions, together known as the Terms of Credit. These terms specify the following elements:

• Interest Rate: The extra amount charged on the loan that the borrower has to pay along with the principal amount.
• Collateral (Security): An asset that the borrower owns and pledges as a guarantee to the lender until the loan is repaid. If the borrower fails to repay the loan, the lender has the right to sell the asset to recover the payment. Examples include land, buildings, vehicles, livestock, and bank deposit documents.
• Documentation: The paperwork associated with the loan, which records the identity of the lender and the borrower, the loan amount, and the terms agreed upon.
• Mode of Repayment: The manner and number of instalments in which the loan amount will be repaid.

These terms vary depending on the nature of the lender and the borrower, and their relationship with each other.

Role of Credit in the Economy — Two Examples

Credit plays a crucial role in the process of production. The two examples below show how credit can either help a person or push them into difficulty, depending on the source of the loan.

Example 1 — Loan from the Formal Sector (Bank Loan to a Wheat-Growing Farmer)

Suppose a farmer takes a loan from a bank at a reasonable rate of interest before sowing the wheat crop, in order to cover the cost of seeds, fertilisers, and other cultivation expenses. Once the crop is ready and sold at a good price, the farmer repays the bank loan and is left with a surplus that can be used to prepare for the next season. In this case, the cheap and timely credit from the bank helps the farmer keep the production cycle going smoothly.

Example 2 — Loan from the Informal Sector (Loan from a Moneylender)

On the other hand, if a farmer borrows from a moneylender at a very high rate of interest and the crop fails due to bad weather or some other reason, the farmer is unable to repay the loan. Because the interest rate is so high, the debt keeps increasing, and the farmer may be forced to mortgage or even sell their land to the moneylender. In this way, expensive credit from the informal sector can push a borrower into a debt trap.

Comparing the Two Examples

Formal and Informal Sector Loans

Formal Sector Loans

This includes loans from banks and cooperative societies. The Reserve Bank of India (RBI) supervises the functioning of these institutions. Banks decide the interest rate they will offer on deposits and charge on loans. The RBI monitors that banks maintain a minimum cash balance out of the deposits they receive, so that depositors face no inconvenience, and it also ensures that loans are available not just to large businesses, but also to small farmers, small-scale industries, and small borrowers.

Informal Sector Loans

This includes moneylenders, traders, employers, relatives, and friends. There is no organisation that supervises the credit activities of lenders in the informal sector. As a result, they can set any interest rate they wish, which is often very high, and can also impose terms that are unfavourable to the borrower.

Why Do Formal Sector Loans Need to Expand?

In India, poor households still depend on informal sources for a large part of their credit needs. This is a matter of concern for the following reasons:

• Informal lenders often charge a very high rate of interest, so a large part of the borrower’s income goes towards repaying the loan.
• The high cost of borrowing leaves very little scope for the borrower to save or invest further.
• In some cases, the burden of repayment is so large that the borrower falls into a Debt Trap.
• Informal credit sometimes comes with exploitative terms, such as forced mortgage of land or conditions resembling bonded labour.

This is why it is important that formal sector credit — from banks and cooperative societies — expands, especially in regions and among groups where poor households still depend heavily on moneylenders. When cheap and affordable credit becomes widely available, it enables broader economic development.

Formal Sector Credit in India

The Reserve Bank of India (RBI) supervises the functioning of banks in the country. The RBI monitors that banks provide loans not only to profitable businesses and traders, but also to small cultivators, small-scale industries, and small borrowers on fair terms. The RBI also periodically reviews whether banks are following its rules and guidelines.

Cheap and affordable credit is crucial for the country’s development. It allows people to invest in agriculture, small businesses, and other productive activities, which in turn raises income and employment. Even so, the reality is that most poor households in India still depend on informal sources of credit — such as moneylenders, relatives, and friends — since formal credit does not easily reach them. Expanding the reach of formal sector credit to the poor and underprivileged remains an important challenge.

Self Help Groups (SHGs) for the Poor

In recent years, Self Help Groups (SHGs) have emerged as an effective way of providing timely and reasonable credit to poor households, especially women.

Formation and Working of SHGs

• A Self Help Group typically consists of 15-20 members, generally women, belonging to the same neighbourhood.
• Members save small amounts regularly and deposit them with the group. Over a few months, the group builds up a common fund from these savings.
• Members can borrow small loans from this common fund, at interest rates that are usually lower than those charged by moneylenders.
• These loans are collateral-free, meaning members do not need to pledge any asset or security to obtain a loan.
• Decisions on who should get a loan, for what purpose, how much, and on what terms are taken by the group members themselves.
• The repayment period and instalments are also decided by the group, allowing flexibility suited to the borrower’s needs.
• Once a group builds a regular savings record, banks also become willing to lend to the SHG as a whole, based on its collective fund and repayment history.

Benefits of SHGs for Poor Women

• Timely, collateral-free credit helps members avoid dependence on moneylenders and their high interest rates.
• Women can start small businesses, such as tailoring, dairy farming, or handicrafts, and become self-reliant.
• Regular group meetings raise awareness among women about social and economic issues and strengthen their ability to take decisions.
• SHGs help poor households escape the burden of heavy debt and improve their bargaining power with moneylenders and traders.
• In this way, SHGs not only provide access to credit, but also play an important role in the social empowerment of women.

Key Points to Remember

• The barter system suffered from the problem of the double coincidence of wants, which money solved.
• Money functions as a medium of exchange and is accepted because the government authorises it.
• Only the RBI has the authority to issue currency notes in India.
• Demand deposits with banks are also considered a form of money.
• Credit is an agreement whose terms include the interest rate, collateral, documentation, and mode of repayment.
• Formal sector loans (banks, cooperatives) are cheaper and regulated, while informal sector loans (moneylenders) can be expensive and exploitative.
• The RBI supervises banks to ensure affordable credit is available, yet most poor households still depend on informal sources.
• Self Help Groups (SHGs) consist of 15-20 members, usually women, who use savings and collateral-free loans to help the poor become self-reliant.

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