- When both parties agree to sell and buy each other’s commodities. It is known as double coincidence of wants.
- It is a matter where a person desires to sell is exactly what the other wishes to buy.
- Barter system -where goods are directly exchanged without the use of money where double coincidence of wants is an essential feature.
- Money acts as an intermediate in the exchange process, it is called a medium of exchange.
- Deposits in the bank accounts can be withdrawn on demand, these deposits are called demand deposits.
- Demand deposits offer another interesting facility.
- It is this facility which lends it the essential characteristics of money (that of a medium of exchange). Banks charge a higher interest rate on loans than what they offer on deposits.
- The difference between what is charged from borrowers and what is paid to depositors is their main source of income.
- Credit (loan) refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payment.
- Collateral is an asset that the borrower owns (such as land, building, vehicle, livestock, deposits with banks) and uses this as a guarantee to a lender until the loan is repaid.
- Property such as land titles, deposits with banks, livestock are some common examples of collateral used for borrowing. Interest rate, collateral and documentation requirement, and the mode of repayment together comprise what is called the terms of credit.
- The former are loans from banks and cooperatives.
- The informal lenders include moneylenders, traders, employers, relatives and friends, etc.
- The Reserve Bank of India supervises the functioning of formal sources of loans.
- The banks maintain a minimum cash balance out of the deposits they receive.
- The RBI monitors the banks in actually maintaining cash balance.
- The RBI sees that the banks give loans not just to profit-making businesses and traders but also to small cultivators, small scale industries, to small borrowers etc.
- Periodically, banks have to submit information to the RBI on how much they are lending, to whom, at what interest rate, etc.
- There is no organisation which supervises the credit activities of lenders in the informal sector.
- Higher cost of borrowing means a larger part of the earnings of the borrowers is used to repay the loan.
- Cheap and affordable credit is crucial for the country’s development.
- It is necessary that banks and cooperatives increase their lending particularly in the rural areas, so that the dependence on informal sources of credit reduces.
- While formal sector loans need to expand, it is also necessary that everyone receives these loans.
- Banks are willing to lend to the poor women when organised in SHGs, even though they have no collateral as such.
- SHGs are the building blocks of organisation of the rural poor.