Money and Credit Flashcards
What was Barter system?
Barter System was followed before the introduction of money. In barter system, people used to directly exchange good with each other without the exchange of money.
State some of the problems with the Barter system.
Problems with the Barter system -
1. What a person wants to sell may not the exact product the other person wants to buy.
What is double coincidence of wants?
What a person wants to sell may not the exact product the other person wants to buy. This is called the double coincidence of wants.
Economy with money eliminated the need of __________________________
Double coincidence of wants
Explain the money nowadays and money in the medieval time.
In the medieval time, money was in the form of metallic and gold coins.
Nowadays, money is in the form of paper notes and coins. This type of money don’t have any intrinsic value, it has only fiat value. We believe in the fiat value and use them as a medium of exchange because it is authorized by the government of India (RBI) and no individual or organisation is allowed to issue the currency.
Explain the benefits of using money as a medium of exchange.
What a person wants to sell may not the exact product the other person wants to buy. Money eliminated this problem.
Explain deposits in banks.
- Extra money can be deposited in banks with a particular bank account which will give interest.
- Then, that deposited money can be withdrawn on demand.
Explain cheque payment.
A check is paper instructing the bank to pay specific amount from the person’s account to the person in whose name the check has been issued.
How banks are able to give interest on the money deposited by people?
- With the deposited money, banks give some of it to people who take loans from the banks.
- The interest the people who have taken loans from the banks have to pay is usually more than the interest banks give to depositers. So, with the different in interest rate, banks make profit.
- Not all depositer’s desposited money is given to borrowers.
what are the 2 different types of loans?
If the taken loan increases the income of the borrower, then the loan is a positive loans. While, if the taken loans does not increase the income of the borrower, then the loan is a negative loan. The loans is positive or negative is determined by the risk factor.
Explain terms of credit.
Terms of Credit are the agreements of the loan taken .Terms of Credit comprises of -
1. interest rate
It is the % of extra money you have to pay to the lender according to
the duration for which you are having his/her money.
2. Collateral and your documentation requirements
It is an asset that borrower own [land, building, deposits with banks,
etc.] and it is used as a guarantee to a lender until the loan is repaid.
They are a security against the loan taken by the borrower.
3. Mode of repayment.
It is the mode by which the borrower will pay the borrowed money. It
can be in the form of Instalment/ lump sum/ gold/ property.
Explain the variety of credit arrangements.
- Landless labourers
- They have no work so they depend on the employer for money.
- High interest rate is charged on them when they take loans from big landowners.
- Other terms of conditions. - Small farmers
- They take loans from traders to buy resources for farming.
- They are charged with high interest rate.
- They also have to promise traders that they will sell their crops only to them. - Medium landowners
- May receive loans from banks.
- Low interest rate.
- Formal terms of conditions. - Loans from cooperatives
- members pool their resources for cooperation in certain areas.
- They use pooled resources as a collateral to raise funds from banks.
Explain the formal and informal sector loans in India.
- Formal Sector Loans
- They are the loans taken from banks and cooperatives. These banks are supervised by RBI
- Banks should maintain minimum cash.
- Loan should be given to all.
- Banks have to submit information to RBI. - Informal Sector Loans
- There is no supervision of government. It includes moneylenders, traders, employers and relatives, etc.
- Unfair means can be easily adopted as no organisation is supervising the credit activity
Why formal sector sector loans should be promoted?
- Banks and cooperatives should lend more because unecessary high interest rate is charged on borrowers which makes them fall in debt trap.
- Cheap and affordable credit is crucial for country’s development.
Why poor household don’t take loans from formal sectors?
- Lack of awareness.
- Low level of education
- The don’t have any collateral.
- Lack of familarity with the procedures done to take a loan.
