Money And Credit Class 10 Notes PDF

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Money And Credit Class 10 Notes

Money as a Medium of Exchange
Money acts as an intermediate in the exchange process, it is called a medium of exchange. A person
holding money can easily exchange for any commodity or service that he or she might want.
Modern Form of Money
In the early ages, Indians used grains and cattle as money. Thereafter came the use of metallic coins –
gold, silver, and copper coins – a phase that continued well into the last century. Now, the modern forms
of money include currency – paper notes and coins. The modern forms of money – currency and
deposits – are closely linked to the working of the modern banking system.
In India, the Reserve Bank of India issues currency notes on behalf of the central government. No other
individual or organization is allowed to issue currency. The rupee is widely accepted as a medium of
exchange in India.
Deposits in Banks
The other form in which people hold money is as deposits with banks. People deposit their extra cash
with the banks by opening a bank account in their name. Banks accept the deposits and also pay an
amount as interest on the deposits.
The deposits in the bank accounts can be withdrawn on demand, these deposits are called demand
deposits. The payments are made by cheque instead of cash.
A cheque is a paper instructing the bank to pay a specific amount from the person’s account to the
person in whose name the cheque has been issued.
Loan Activities of Banks
Banks keep only a small proportion of their deposits as cash with themselves. These days banks in
India holds about 15% of their deposits as cash. This is kept as a provision to pay the depositors who
might come to withdraw money from the bank on any given day. Banks use the major portion of the
deposits to extend loans. There is a huge demand for loans for various
economic activities.
Banks charge a higher interest rate on loans than what they offer on deposits. The difference between
what is charged by borrowers and what is paid to depositors is their main source of income for banks.

Terms of Credit

Every loan agreement specifies an interest rate that the borrower must pay to the lender along with the repayment of the principal. In addition, lenders also demand collateral (security) against loans.

Collateral (Security) is an asset that the borrower owns (such as land, building, vehicle, livestock, and deposits with banks) and uses this as a guarantee to a lender until the loan is repaid. If the borrower fails to repay the loan, the lender has the right to sell the asset or collateral to obtain payment.

Interest rate, collateral, and documentation requirement, and the mode of repayment, together, are called the terms of credit. It may vary depending on the nature of the lender and the borrower.

Formal Sector Credit in India

Cheap and affordable credit is crucial for the country’s development. The various types of loans can be grouped as follows:

Formal sector loans:

These are the loans from banks and cooperatives. The Reserve Bank of India supervises the functioning of formal sources of loans. Banks have to submit information to the RBI on how much they are lending, to whom, at what interest rate, etc.

Informal sector loans:

These are loans from moneylenders, traders, employers, relatives, and friends, etc. There is no organization that supervises the credit activities of lenders in the informal sector. There is no one to stop them from using unfair means to get their money back.

Formal and Informal Credit

The formal sector meets only about half of the total credit needs of rural people. The remaining credit needs are met from informal sources. It is important that formal credit is distributed more equally so that the poor can benefit from cheaper loans.

  1. It is necessary that banks and cooperatives increase their lending, particularly in rural areas, so that the dependence on informal sources of credit reduces.
  2. While the formal sector loans need to expand, it is also necessary that everyone receives these loans.
Language English
No. of Pages8
PDF Size3 MB

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