CBSE Class 10 | Economics Chapter: Money and Credit
Money and Credit
Introduction
Money and credit are two powerful instruments that drive modern economies. From ancient barter systems to digital transactions, money has evolved as a universally accepted medium of exchange. At the same time, credit has become essential for economic growth, allowing people and businesses to borrow, invest, and expand. This chapter explains the functions of money, types of credit, and the role of financial institutions like banks and cooperatives in the Indian economy.Money and Credit Class 10
Understanding how money and credit work is crucial not just for exams but also for everyday decision-making. As economies grow more complex, the significance of monetary systems and credit mechanisms becomes increasingly critical in bridging the gap between poverty and prosperity.
I. What is Money?
Barter System: Before Money Existed
- In earlier times, people exchanged goods for goods—known as the barter system.
- This system had several limitations:
- Lack of double coincidence of wants (both people must want what the other offers).
- Difficult to measure and store value.
- No standard unit of account or means of deferred payment.
The barter system was not practical in large or complex economies and hindered the expansion of trade and commerce.
Evolution of Money
- With economic growth and trade expansion, societies needed a more efficient system.
- Money emerged in the form of:
- Metal coins (gold, silver, copper)
- Paper currency (government-issued notes)
- Plastic money (credit/debit cards)
- Digital money (UPI, online banking, mobile wallets)
Each stage in the evolution of money marked a shift towards greater efficiency, security, and speed in transactions.
Functions of Money
- Medium of exchange: Enables the buying and selling of goods/services.
- Measure of value: Helps to value products in standard units.
- Store of value: Money can be saved for future use.
- Standard of deferred payments: Used to settle future obligations (e.g., EMIs, rent).
Money solved the limitations of the barter system and facilitated economic growth, entrepreneurship, and investment.
II. Modern Forms of Money
Currency Notes and Coins
- Issued by the Reserve Bank of India (RBI).
- Legal tender across the country.
- All citizens must accept it as a form of payment.
The RBI ensures the availability of clean notes, controls inflation, and regulates the money supply.
Bank Money and Cheques
- Individuals deposit their savings in banks.
- These savings can be accessed via cheques, debit cards, or digital means.
- Banks keep a portion of deposits as Cash Reserve Ratio (CRR) with the RBI and lend the rest.
This is known as credit creation—banks generate money by issuing loans, thus expanding the money supply in the economy.
Rise of Digital Transactions
- UPI, NEFT, RTGS, IMPS, and mobile wallets have transformed how people transfer money.
- Encourage transparency and reduce black money circulation.
- Government initiatives like Digital India promote cashless payments even in rural areas.
Digital payments are secure, fast, and cost-effective, especially during emergencies like the COVID-19 pandemic.
III. What is Credit?
Understanding Credit
- Credit is the ability to borrow money or goods with the promise to repay later.
- Credit is not inherently good or bad—it depends on the borrower’s ability to repay.
It acts as a catalyst for investment in agriculture, small businesses, education, health, and consumption.
Case Study: Salim the Farmer
- Salim takes a loan from a local moneylender to buy seeds and fertilisers.
- If he gets a good harvest, he earns a profit, repays the loan, and improves his living standard.
- If the crop fails due to drought or pests, he cannot repay the loan and falls into a debt trap.
Positive and Negative Impact of Credit
| Type | Example | Outcome |
|---|---|---|
| Positive | Business expansion, farming | Increased income, growth |
| Negative | Informal loans at high rates | Debt, poverty, loss of assets |
Thus, while credit can empower, it can also ruin lives when misused or when systems exploit the poor.
IV. Types of Credit Sources
Formal Sector Credit
- Includes banks, cooperatives, microfinance institutions.
- Regulated by the RBI and government.
- Lower interest rates (9–12%).
- Legal contracts and documentation ensure transparency.
- Require collateral—an asset like land, vehicle, gold—as security.
Informal Sector Credit
- Includes moneylenders, landlords, relatives, shopkeepers, traders.
- Not regulated; charge very high interest rates (often 30–60%).
- Do not require documentation or collateral.
- Borrowers often get exploited through unfair terms or threats.
Rural Credit Scenario
- According to NABARD, nearly 85% of rural households depend on informal sources.
- Barriers include lack of documents, illiteracy, absence of nearby banks, and caste discrimination.
Women and small farmers are especially vulnerable to informal credit dependency.
V. Role of Financial Institutions
🏛️ Commercial Banks
- Offer savings accounts, fixed deposits, loans, and digital services.
- Provide education loans, home loans, vehicle loans, and business loans.
- Encourage people to save and invest in formal channels.
Cooperative Societies
- Formed by people with similar economic interests—like farmers, artisans, or weavers.
- Provide low-interest loans, fertilisers, seeds, and other goods.
- Have democratic decision-making and are community-driven.
Examples: Primary Agricultural Credit Societies (PACS), Urban Cooperative Banks.
Microfinance Institutions (MFIs)
- Provide small loans to low-income individuals without collateral.
- Support women entrepreneurs, small farmers, and street vendors.
- Examples: SKS Microfinance, Bandhan Bank (initially an MFI).
Self Help Groups (SHGs)
- Informal groups of 15–20 people, mostly women.
- Collect monthly savings and provide loans to members.
- After building a credit history, eligible for bank loans.
SHGs enhance women’s confidence, promote entrepreneurship, and reduce dependency on informal sources.
VI. Challenges and the Way Forward
Unequal Access to Credit
- Urban and wealthy people get easy loans from banks.
- Poor, landless, or uneducated people face difficulty accessing formal credit.
- Women face social barriers and are often excluded from formal finance.
Consequences
- Increased debt traps in rural India.
- Loss of land, livestock, and livelihood.
- Migration to cities in search of wage labour.
Solutions
- Financial Inclusion: Expanding banking services to villages and marginalised groups.
- Jan Dhan Yojana: Opened over 40 crore no-frill bank accounts.
- Kisan Credit Cards (KCC): Short-term loans to farmers at subsidised interest.
- Bank Mitra: Local banking correspondents assisting rural customers.
- Digital Awareness Campaigns: Training on UPI, ATM use, mobile banking.
- Collateral-Free Loans: Special schemes for SHGs and women entrepreneurs.
Governments, NGOs, and financial institutions must work together to create an equitable credit ecosystem.
Conclusion
Money and credit are the backbone of any economy. While money facilitates trade and eliminates the inefficiencies of the barter system, credit promotes investment, improves livelihoods, and accelerates development.
However, if credit is unequally distributed or misused, it can cause distress and deepen inequality. Formalising credit sources, promoting financial literacy, and empowering marginalised sections—especially rural poor and women—are essential for inclusive economic growth.
As young learners and future citizens, understanding the role of money and credit prepares you to make informed financial decisions, contribute responsibly to the economy, and uphold the values of fairness and opportunity.