Money and Credit

This chapter explains why money is used as a medium of exchange and how it removes the need for the double coincidence of wants required in a barter system. It describes the modern forms of money - currency issued by the Reserve Bank of India as legal tender, and demand deposits in banks that can be used through cheques - and how banks mediate between depositors and borrowers by keeping a small cash reserve and lending the rest. Through the contrasting examples of Salim and Swapna it shows that credit can raise incomes or push a borrower into a debt-trap, and it sets out the terms of credit: interest rate, collateral, documentation and mode of repayment. The chapter compares formal sources (banks and cooperatives, supervised by the RBI) with costlier informal sources (moneylenders and traders), highlights the unequal access of the poor to cheap credit, and explains how Self-Help Groups provide collateral-free credit to poor women. A high-scoring, concept-rich chapter of the Board syllabus.