Money and Credit
Money makes exchange easy, and credit lets people do more than their savings allow. This Class 10 Economics chapter explains how money removes the need for barter, the role of banks and credit, the difference between formal and informal lending, and how Self-Help Groups help the poor.
Learning objectives
- Explain money as a medium of exchange.
- Describe modern forms of money and deposits.
- Explain the terms of credit.
- Compare formal and informal sources of credit.
Key concepts
Money as a medium of exchange
In barter, both people must want what the other has — a 'double coincidence of wants' — which is difficult. Money solves this by acting as a medium of exchange: it is accepted by everyone, so a person can sell goods for money and use that money to buy whatever they need. This makes trade simple and efficient.
Modern forms of money
Modern money has no value of its own and is accepted because it is authorised by the government; the Reserve Bank of India issues currency notes. Besides cash, people keep money as deposits in banks, which they can withdraw on demand or pay using cheques. Banks thus hold a large part of people's money safely.
Credit and its terms
Credit means a loan, where the lender provides money, goods or services in return for repayment with interest later. The terms of credit include the rate of interest, the collateral (an asset promised as security), the documentation required, and the mode of repayment. These terms vary between different lenders.
Formal and informal credit
Formal sector credit comes from banks and cooperatives, which are supervised by the Reserve Bank of India and charge reasonable interest. Informal sector credit comes from moneylenders, traders and friends, who are not supervised and often charge very high interest. The poor depend heavily on costly informal credit, so expanding cheap formal credit and Self-Help Groups (SHGs) is important.
Key definitions
- Medium of exchange
- Anything widely accepted in return for goods and services, like money.
- Collateral
- An asset the borrower promises to the lender as security for a loan.
- Formal credit
- Loans from banks and cooperatives, supervised by the RBI.
- Self-Help Group
- A small group that pools savings and provides small loans to members.
Solved examples
Q1. What problem of barter does money solve?
Solution: The double coincidence of wants.
Q2. Who issues currency notes in India?
Solution: The Reserve Bank of India (on behalf of the government).
Q3. Name one term of credit.
Solution: Rate of interest (also collateral, documentation, mode of repayment).
Common mistakes to avoid
- Confusing formal (bank) with informal (moneylender) credit.
- Thinking modern money has value of its own.
- Forgetting that collateral is security for a loan.
- Believing all credit is harmful (cheap formal credit can help).
Money and Credit — MCQ Quiz
10 questions with instant feedback. Use number keys 1–4 to answer.
Money mainly acts as a:
Practice questions
Short answer
What is the double coincidence of wants?
In barter, the need for each person to want exactly what the other has to offer.
What is collateral?
An asset a borrower promises to the lender as security for a loan.
What is a Self-Help Group?
A small group that pools members' savings and gives them small loans.
Long answer
How does money overcome the problem of barter, and what are its modern forms?
In a barter system, goods are exchanged directly for goods, which requires a 'double coincidence of wants' — both people must want exactly what the other has to offer at the same time, which is rare and inconvenient. Money overcomes this by serving as a medium of exchange that everyone accepts; a person can sell their goods for money and then use that money to buy whatever they need from anyone, so the two sides of an exchange need not match. Modern money has no value of its own and is accepted only because it is authorised by the government — in India the Reserve Bank of India issues currency notes. Besides cash, money is also held as deposits in banks, which people can withdraw on demand or transfer by cheque, making money safe and easy to use.
Compare formal and informal sources of credit and explain why the poor often depend on informal credit.
Credit, or loans, can come from two kinds of sources. Formal sources include banks and cooperative societies, which are supervised by the Reserve Bank of India; they charge reasonable rates of interest, follow transparent terms and cannot exploit borrowers. Informal sources include moneylenders, traders, employers, relatives and friends, who are not supervised by any authority; they often charge very high rates of interest and may impose harsh terms. Despite the high cost, the poor frequently depend on informal credit because formal lenders require collateral and documentation that the poor often lack, and banks may be unwilling to lend small amounts to them. This is why expanding cheap formal credit and promoting Self-Help Groups, which lend to members on easy terms, is important for reducing the burden of costly informal loans on poor people.
HOTS (Higher Order Thinking)
Why can high-interest informal credit trap a poor borrower in debt?
Because the heavy interest can grow faster than the borrower can repay, forcing them to borrow again to clear old debts, leading to a cycle of rising debt.
How do Self-Help Groups help women and the poor get credit?
By pooling members' small savings, SHGs can give members loans without collateral at low interest and build their habit of saving, giving them access to credit they would otherwise be denied.
Quick revision
Revision notes
- Money = medium of exchange; solves the double coincidence of wants.
- Modern money: RBI-issued currency + bank deposits (withdraw/cheque).
- Credit = loan; terms: interest, collateral, documentation, repayment.
- Formal (banks/cooperatives, RBI-supervised, low interest) vs informal (moneylenders, high interest); SHGs help the poor.
Key takeaways
- Money makes exchange easy and efficient.
- Cheap formal credit beats costly informal credit.
- SHGs widen credit access for the poor.
Frequently asked questions
What is the difference between formal and informal credit?
Formal credit (banks/cooperatives) is RBI-supervised with fair interest; informal credit (moneylenders) is unsupervised and often very costly.
Who issues money in India?
The Reserve Bank of India, on behalf of the government.
Why is collateral required?
It is security the lender can claim if the borrower fails to repay.