NCERT Class 10 Economics Chapter 3: Money & Credit Complete Notes Part 2

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Money & Credit

Depositor vs. Borrower

  • Bank hold 15% of total deposit as cash

  • B/w surplus & those who need

  • Extend loans

  • Higher interest rate on loan

  • Diff. = INCOME for bank

Iamge of Depositor vs. Borrower

Iamge of Depositor vs. Borrower

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Let’s understand that very simple diagram here, this diagram try to explain here is I am a depositor, I have 1000 Rs with me, so deposit that 1000 Rs. in the bank and bank pay interest and rule of the deposits that I have made in the bank is a rate of 3%, so every year I get to have 3% extra of the total amount I have deposited in the bank.

However there could be guess, where you have required borrower from the bank. Now this borrower can be for let’s say construction of your houses, agriculture farmer for a cropping season, to establishment for kind of small skills and industries or any another purpose. You are kind of borrowing from the bank, that bank has X deposits in the bank, bank that would keep the money and this would be provided to the borrower, but when the bank is providing money to the borrower it is charging a higher interest rate as compared to the when deposit rate, when it is giving to the depositor, so the bank is giving say 3% of interest to depositor but bank would be charging 9% from the borrower. If the borrower is borrower 10,000 Rs. He would have to pay the interest of the 9%.

Now this difference of the interest that the bank is giving to the depositor and the bank is taking from the borrower is the difference and net income of the bank. Next is credit or a loan situation.

Credit (Loan) Situation

  • Lender supplies the borrower in return for promise of future payment

  • For industry, housing, crop production

  • Can push borrower in further credit (crop failure)

Now a credit or loan situation as I said could rise to due various region for example I’m looking for buy a house, I’m looking for higher education, I’m looking for agricultural crop or to setup industries or for health purposes. All could be the reason where you might be looking for credit or loan from the bank. Now this loan could be in two ways, it could be from a formal sector or informal sector, we will later see, how this works.

Now banks are the formal sector from where you can take the loans, what is happening here is let’s say I’m taking a loan to establish something, I take the loan from bank, and interest rate is 6% and my industries working very nicely, so what would happens in less than a year I repay my loan when I’m repay my loan, I’m paying principal amount that I had taken from the bank plus the interest for the 6 months that is bank charged to me, when I am repaying principal of the interest I’m done with my loans, and I do not have another liabilities.

However in this case what would happen. Since my industries are doing well, I got definitely benefited from the loan but let’s say another example, could be a case of agricultural farmer. This farmer takes the loan for the cropping season, however let’s say due to drought since weather condition are not good, crop are not good and the farmer was not able to repay the loan. As a result a farmer gets struck with higher debt, so he is not able to repay the loan as a result debt a farmer increase. When you have farmer take higher time to repay the loan that has been collected over the period and he would be finally pushed in to further loan situation and this technically happens predominantly with the informal sector where you have a very high rate of interest and farmer is not able to repay the higher rate of interest.