Money and Credit: Class 10 Economics · Chapter 3

Think back over yesterday. Your family may have bought milk at dawn, paid an auto fare, topped up a phone and settled the school bus fee. Some of these were payments for goods, some for services. One or two may not have been payments at all, only a promise. The kirana shop may simply have written the groceries in its khata, to be settled at the end of the month.

Money is in almost every one of these deals, and so is credit, the promise to pay later. This chapter asks two questions. Why does everyone want money, and what forms does it take today? And who lends to whom in India, on what terms, and what does that mean for the poor?

3.1 Money as a medium of exchange

Imagine a village where nobody uses money. A potter has a cart full of pots and wants a sack of rice. She finds a rice farmer, but he does not need pots: his roof is fine and his kitchen is full. What he wants is cloth. The weaver who has cloth, in turn, wants pots but has no use for rice. Each of the three has something another one wants, yet no two of them can strike a deal (Fig. 3.1).

Swapping goods directly like this is called the barter system (वस्तु विनिमय). A swap can happen only when both sides want what the other is offering. Economists call this a double coincidence of wants. Finding it is slow and often impossible, and the more varied the goods in an economy, the harder it gets.

Now bring money into the village. The potter sells her pots to anyone who wants pots and takes money for them. With that money she buys rice from the farmer, who does not care whether she ever made a pot. The farmer, in turn, pays the weaver for cloth. Money breaks one hard swap into two easy steps, a sale and a purchase, so nobody needs to find a perfect match.

Notice what made this work: everyone in the village accepts money, whatever they plan to buy with it. Economists sum up this go-between role in a phrase: money is a medium of exchange (विनिमय का माध्यम). A seller is happy to take it even when she wants nothing today, because it will buy whatever she chooses next week.

3.2 Modern forms of money

Money has not always looked like the notes in your pocket. Anything that people widely accepted could serve. In early India, grain and cattle were used to pay for things. Later came coins of gold, silver and copper, whose metal was itself valuable, and they stayed in use until well into the twentieth century. The timeline below picks out a few milestones.

Currency

Today's money is currency: paper notes and coins. Tear a ₹500 note in half and you hold two scraps of paper worth almost nothing, yet the same note, whole, buys a week's vegetables. Its value does not lie in what it is made of. It lies in a rule that everyone relies on.

That rule is set by law. The RBI Act, 1934 gives the Reserve Bank of India (RBI) the sole right to issue currency notes, which it does on behalf of the central government. The law also makes these notes legal tender: a payment in rupee notes settles a debt anywhere in India, and the person being paid cannot turn them down. Look at a note and you will find the government's guarantee and the RBI Governor's signed promise to pay the bearer. With the whole country standing behind it, everyone accepts the rupee.

Deposits with banks

The second form of money sits in bank accounts. Take Bhola, who runs a tea stall near the bus stand in Guwahati. By evening his cash box holds about ₹4,000, and keeping it at home overnight is risky. So most days he drops the bulk of it into his savings account. There it is safe, it earns a little interest, and he can take it out again at any time from an ATM or the bank counter.

Because the account holder can take this money out on demand, such balances are called demand deposits (माँग जमा). They have a second, more surprising use: they can pay other people directly, without anyone touching cash.

Consider Farida, who runs a tailoring unit in Lucknow. She owes Joseph, her cloth supplier, ₹38,500. Instead of counting out notes, she writes him a cheque: a signed slip that tells her bank to pay ₹38,500 from her account to Joseph. Joseph deposits it in his own bank. The two banks settle the cheque through a clearing house, and the money moves from her account to his (Fig. 3.2). Not a single note changes hands.

So demand deposits do the work of money. Shops, suppliers and employers accept them in payment just as they accept notes, and they settle debts directly. That is why economists count currency plus demand deposits as the money of a modern economy. This second kind of money is a creation of the banking system. Take the banks away and there is nothing to deposit into, and nothing for a cheque or UPI to draw on. The story of modern money is also the story of banks.

Digital payments: deposits on the move

On 8 November 2016 the government withdrew the legal-tender status of the old ₹500 and ₹1,000 notes, about 86 per cent of the currency then in use. People were asked to deposit them in banks. This step, called demonetisation, was meant to fight black money and fake notes and to push people towards paying through their bank accounts. Economists still debate how far it met these aims, but it did speed up the shift to digital payments.

Debit cards, internet banking, point-of-sale card machines and, above all, the Unified Payments Interface (UPI) now let people spend their demand deposits from a phone. UPI, built by the National Payments Corporation of India under the RBI's oversight, went live in 2016. In 2025–26 it handled more than 24,162 crore transactions worth about ₹314 lakh crore (Ministry of Finance, August 2026). In September 2026 alone it carried about 2,407 crore payments, roughly 80 crore every day (NPCI).

3.3 Loan activities of banks

What does a bank do with all the money people deposit? Watch a branch for a day. Some customers take cash out, others bring cash in, and the two flows roughly cancel out. It is rare for many people to withdraw large sums on the same day. So a bank needs only a thin cushion of cash and reserves, a small slice of its deposits. The rest is lent to farmers, traders, students, home-buyers and businesses who need funds.

A bank, then, stands between savers and borrowers, matching people who have money to spare with people who need it. Its reward is the margin in Fig. 3.3: say 10 per cent collected from borrowers against 4 per cent paid to savers. That margin, far more than any fees, is where most of a bank's income comes from. It pays for staff and branches, covers loans that go bad and leaves a profit.

3.4 Two different credit situations

Borrowing is part of daily life. A family buys a phone on monthly instalments. A farmer takes seed from a dealer and pays after harvest. A shop gets stock from a wholesaler and settles next week. In each case one side hands over money, goods or services now, and the other promises to pay later. That arrangement is credit (साख), and the amount owed is a loan. Is credit good for the borrower? Two stories suggest the answer depends on the situation.

Situation 1: the Diwali rush. Gurpreet runs a small sweet shop in Amritsar. Her sales in the three weeks before Diwali are bigger than in any three months of the year, but only if her shelves are full. Six weeks ahead she needs khoya, sugar, dry fruit and gift boxes, and two extra helpers. Her own savings cover only a part. So she draws ₹1 lakh from an overdraft her bank has given her against the shop's stock. The festival crowds clear her shelves, and within six weeks she has repaid the bank from her sales, interest and all.

Credit here paid for Gurpreet's working capital: the raw materials and wages a business must pay for before the sales money comes in. Without the loan she would have sold far less in her best season. With it she earned more, repaid easily and kept the extra profit, so credit left her better off.

Situation 2: a borewell that failed. Lakshmi farms three acres of rain-fed land in Anantapur district, Andhra Pradesh. Hoping to grow a second crop in winter, she borrows ₹40,000 from a moneylender at 3% a month to drill a borewell. The bore strikes only a trickle of water, and as the dry season goes on and the water table falls, it runs dry altogether. There is no winter crop and no extra income. To try again she borrows more to drill deeper, and that bore fails too. Two years later her debt is larger than a whole year's earnings from the farm, and she gives one acre to the moneylender to settle part of it. She now works on other people's fields for part of the year.

Most farm borrowing is not for borewells but for the crop itself. A farmer pays at sowing for seed, fertiliser, diesel or power and sprays. The money comes back only when the harvest is sold, three months or more later. A crop loan bridges that wait. Its repayment rides on the harvest: a good crop clears it, while a failed one leaves it hanging. And the harvest depends on rain, pests and prices that no farmer controls.

Lakshmi's story has a name. When a loan cannot be repaid, new loans pile on old ones. If each season leaves the family deeper in debt, the borrower is in a debt trap (कर्ज़-जाल). The word fits: the harder she works, the more of what she earns goes to interest, and escaping often costs the family its land, its most valuable asset.

So credit is neither good nor bad in itself. What decides the outcome is how risky the activity is, and whether anything cushions the borrower when it goes wrong. Gurpreet's festival sales were all but certain, and her bank charged a modest rate. Lakshmi was betting on groundwater she could not see, with a lender charging 36 per cent a year. Support can take many forms: crop insurance such as the Pradhan Mantri Fasal Bima Yojana (2016), cheaper loans, or a lender willing to give more time. Any of these can stop one bad season turning into a debt trap.

3.5 Terms of credit

Read any loan agreement and you will find four kinds of conditions. The first is price. On top of the principal, the sum borrowed, the borrower owes interest at a stated interest rate. Lenders quote the rate per year or per month, and the two are easy to confuse: 2% a month sounds small, but it is 24% a year.

The second is security. Many lenders want something to fall back on if the loan is not repaid. So the borrower pledges an asset, called collateral (समर्थक ऋणाधार), such as land papers, gold ornaments, a fixed deposit or a tractor. The borrower keeps using it, but if the loan goes unpaid, the lender may sell it and take what it is owed.

Formal lenders also ask for documents: proof of identity and address, proof of income such as salary slips or bank statements, and land records for farm loans. Finally there is the mode of repayment. It may be one lump sum after harvest, equal monthly instalments (EMIs) or weekly payments, or even work or a crop handed to the lender. All four together are the terms of credit (Fig. 3.5).

Would Imran have got the same deal from a moneylender? Would a farm worker with no bank statements get it from the same bank? Almost certainly not. The terms on offer change with the kind of lender and with what the borrower owns, as the next section shows inside a single village.

3.6 Variety of credit arrangements

To see how terms of credit vary, let us visit an imaginary village we will call Rampur, where canals water the paddy and vegetable fields. Three of its residents tell us how they borrow.

Kanta grows tomatoes and brinjal on two acres. She buys seed and fertiliser from a dealer in the market town and pays after harvest. No interest is ever mentioned, but there is a catch: a bag of fertiliser costs ₹1,000 in cash and ₹1,120 'on credit', to be settled four months later. That extra ₹120 is interest in disguise, about 3% a month. The dealer also insists that she sell her vegetables through him. He fixes the price on the day and takes a commission, so he is sure to be repaid and earns twice from her crop.

Harish owns eight acres and has land records in his name. He holds a Kisan Credit Card from the bank, which lends him money for each crop at 7% a year. He repays within the year, so the government pays part of the interest for him. The loan costs him only 4% a year (Modified Interest Subvention Scheme, 2025–26). Last year the bank also gave him a loan for a power tiller, with his land as collateral. He sells his paddy when and where the price is best.

Babloo owns no land. He works on farms in the season and at a brick kiln in the dry months. Last year his mother fell ill, and the only lender who would give him money at once was a moneylender in the next village. He lent ₹8,000 at 4% a month, with no papers and no security. He can spare about ₹250 a month towards it. Before the kiln season the contractor also gives him an advance, which is cut from his wages, and he cannot leave the kiln until it is cleared. When such a debt takes away a worker's freedom to leave, it becomes bonded labour, which the Bonded Labour System (Abolition) Act, 1976 made illegal.

Loans from cooperatives

After banks, rural India's other big source of cheap credit is the cooperative (सहकारी समिति). A cooperative is a business owned by the people who use it. Amul, owned by lakhs of milk producers in Gujarat, is India's best-known one. A credit cooperative does the same with money: its members save in it and borrow from it.

Cooperative credit in India is built in three tiers. A primary agricultural credit society (PACS) works in or near the village, a district central cooperative bank stands above it, and a state cooperative bank sits at the top. Rampur's PACS is run by a committee its members elect. Its money comes from members' shares and savings, topped up by loans from the district bank. It gives crop loans on Kisan Credit Cards and also lends for a pump set, a milch buffalo or a fish pond. Every rupee repaid can be lent again to another member.

3.7 Formal sector credit in India

Rampur's lenders fall into two groups. Banks and cooperatives provide formal sector credit: they are registered, follow rules and are supervised. Moneylenders, traders, employers, relatives and friends provide informal sector credit: nobody checks their terms.

How much of India's borrowing is formal? The best evidence comes from the All India Debt and Investment Survey (AIDIS) of the National Statistical Office. Its latest round was carried out in 2019 (NSS 77th round) and recorded what households owed on 30 June 2018. In villages, about two-thirds of the money owed was owed to formal lenders and one-third to informal ones. In towns and cities the formal share was much higher (Fig. 3.7). About 35 per cent of rural households and 22 per cent of urban households were in debt at the time.

The Reserve Bank of India supervises formal lenders. It does this in several ways:

• It fixes the share of deposits that banks must keep as reserves, the cash reserve ratio, and checks that they keep it.
• It makes banks lend to priority sectors, not only to big businesses. From April 2025, 40 per cent of a bank's lending must go to such sectors, including 18 per cent to agriculture, 10 per cent to small and marginal farmers and 12 per cent to weaker sections (RBI, Priority Sector Lending Directions, 2025).
• Banks must report regularly to the RBI how much they lend, to whom, and at what rates of interest.

Informal lenders face no such watchdog. Money-lending is a state subject, and most states have laws that ask moneylenders to take a licence and cap the interest they may charge. But most informal loans are made on trust with no written record, and borrowers who depend on the lender rarely complain, so these laws are hard to enforce. In practice the rate is whatever a desperate borrower agrees to, and recovery can involve threats or public shaming.

Put numbers on the difference. On ₹40,000 for a year, a bank crop loan at 7% costs ₹2,800 in interest; a moneylender at 3% a month costs ₹14,400. The ₹11,600 gap is money a family loses from food, school fees or savings. Dear credit also limits what people dare to try. A tailor who could earn more with a second sewing machine will not buy one if the loan would swallow the extra income. And when the interest due each month is more than the borrower can pay, as for Babloo in Rampur, the debt grows instead of shrinking. Try other loans in the calculator below.

The remedy is more lending by banks and cooperatives, above all in villages. When credit is cheap, a farmer can afford better seed, a weaver a second loom and a young person a small repair shop. Each extra income adds to the country's development. Access to banks has widened: accounts under the Pradhan Mantri Jan Dhan Yojana, opened since 2014, numbered 59.09 crore in August 2026 (Ministry of Finance). An account is only a first step, though; what matters is whether the poor can also borrow from banks on fair terms.

Formal and informal credit: who gets what?

Formal credit is not shared evenly. Surveys find that the richer a household is, the larger the share of its loans that comes from banks and cooperatives. Poorer households, in villages and cities alike, lean much more on moneylenders, employers and traders. The result is unfair: the families that could best afford high interest pay the least, and those who can least afford it pay the most.

What would fix this? Two changes, and both matter. There must be more formal credit overall, so that fewer loans come from costly informal lenders. And a bigger share of it must reach poor households rather than only the well-off, so that the people who most need cheap loans actually get them.

3.8 Self-help groups for the poor

Picture Sunita, who rears goats in a village in Bihar's Gaya district. One of her goats falls sick and she needs ₹5,000 by tomorrow. The nearest bank branch is 12 km away; it wants proof of income and something to pledge, and the loan would take days. A moneylender in the next lane has known her family for years. He hands her the cash that evening with no forms, even though she still owes him from last year. His price arrives later: ₹500 a month in interest, nothing in writing, and visits to her door when she is late. Fig. 3.9 sums up why so many poor families make Sunita's choice.

Since NABARD's first pilot in 1992, a different route to the poor has spread across India. The idea is simple. Bring poor women from one neighbourhood together in small savings circles called self-help groups (SHGs, स्वयं सहायता समूह), so that many tiny savings add up to a fund they control. A group usually has 10 to 20 members. They meet every week or month, and each saves a fixed small sum, as much as she can manage. (Your textbook describes a typical group as 15–20 members saving ₹25–100 each.)

When a member needs money for school fees or a sick child, she borrows from this fund instead of the moneylender. She pays interest at a rate the group has fixed, far below a moneylender's, and that interest swells the group's own fund. A group that keeps saving and repaying for a while (the textbook says a year or two) builds a track record, and banks then lend to it. The loan is made to the group as a whole, to help members set up or expand a source of income. It may buy a goat or a cow, a sewing machine or a loom, stock for a small shop, or seed and fertiliser. It can even win back land pledged to a moneylender.

No outsider runs an SHG. At its meetings the women decide every loan together: who gets it, how big it is, what it is for, the interest and the instalments. And because the bank's loan is owed by the whole group, a member who stops paying hears about it from her neighbours long before the bank notices. This shared responsibility is what persuades banks to lend to poor women's groups that own nothing to pledge: the group's trust takes the place of collateral.

Meeting every week also gives women a forum of their own. Women who could not borrow alone gain an income and a say in how it is spent. Groups also take up matters well beyond money: a child's schooling, a visit to the health centre, violence at home, a broken hand pump. Under the national rural livelihoods mission, village SHGs join into larger federations that can bargain with banks, markets and officials.

Grameen Bank of Bangladesh

What Grameen showed the world is that lending to poor women is not charity. As groups, its borrowers repaid well, and their loans turned into poultry farms, looms, tailoring units and village shops. Microcredit is not a magic cure, though, and economists still debate how far small loans alone can lift families out of poverty. It seems to work best alongside skills, markets and public services. Finding new ways to get fair credit to the poor remains one of the big challenges for developing countries.