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ë A person holding money can easily exchange it for any
commodity or service that he or she might want. Thus,everyone prefers to receive payments in
money and thenexchange the money for things that they want.
ëë It eliminates the need for double coincidence of wants. Money is
something that can act as a medium of exchange in
transactions.
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i.It was a situation that existed in the barter system of exchange,before the introduction of money.
What a person desires to selland buy is exactly what the other wishes to buy and sell. In
thissituation, it is difficult to find a person who is willing toexchange two commodities each other.
ëë Where money is in use goods can be bought and sold to
different people. Whatever one person wants to sell, he can sellit to any one who wants it and
get money. He can use themoney to buy some thing from a different person. Here moneyacts
as a medium of exchange and double coincidence of wants is eliminated.
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i.Money is portable and easy to carry. It solves the problems of
double coincidence of wants.
ii.It is accepted as a medium of exchange because the currencyis authorized by the government of
any country.Moreover, thelaw legalizes the use of money as a medium of payment. Noindividual
in India can legally refuse a payment made incurrency. Hence, it is widely accepted as a
medium of exchange.
-
i.Before the introduction of coins, a variety of objects was usedas money. For example, since the
very early ages, Indians usedgrains and cattle as money in the barter system.
ii. Thereafter came the use of metallic coins ² gold, silver, copper
coins ² a phase which continued well into the last century.
iii. Modern forms of money include currency ² paper notes andcoins. Unlike the things that were
used as money earlier,modern currency is not made of precious metal such as gold,silver and
copper. Unlike grain and cattle, they are neither ofeveryday use. The modern currency is
without any use of its own.
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is accepted as a medium of exchange because it
is authorized by the government of the country. There was nomedium of exchange in barter
system before when goods wereexchanged for goods.
ii.Modern currency solves the problems of double coincidence ofwants where as in barter system
double coincidence of wants was essential.
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i. ollateral is an asset that the borrower owns (such as land,building, vehicle, livestock, deposits
with banks) and uses thisas a guarantee to a lender until the loan is repaid.
ii.If the borrower fails to repay the loan, the lender has the rightto sell the asset or collateral to
obtain payment. Property suchas land titles, deposits with banks, livestock are some
commonexamples of collateral used for borrowing.
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redit (loan) refers to an agreement in which the lender suppliesthe borrower with money,
goods or services in return for thepromise of future payment. The terms of credit are the
following:
i.Interest rate: Formal sector demands less rate of interestcompared to informal sector. At present,
they demand 8 to 12 % interest rate.
ii.ollateral and documentation requirement: It refers to the securityagainst the loan demanded and
kept by the lender until the loan ispaid back.It can be gold or documents of properties or
othercertificates attached with the application.
iii. The mode of repayment:The borrower should pay back theinterest and the principal amount
weekly or monthly by cash orcheques as decided at the time of making agreements.
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ii.There is no organization, which supervises the credit activitiesof lenders in the informal sector.
However, Reserve Bank ofIndia supervises the formal sector and issue guidelines.
iii.ompared to the formal lenders, most of the informal lenderscharge a much higher interest and
put other terms on loans.Thus, the cost to the borrower of informal loans is much higher.This
may push them in to debt trap.
iv.Informal lenders adopt unfair means to get their money back.On the other hand, Banks follow only
legal measures to recoverloans. In many cases, they may even µwrite off¶ agricultural loans.
v.heap and affordable credit is crucial for the country¶s
development. It is available in banks and cooperatives. It
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i.It converts idle money into capital. Normally people take loan toengage in economic activities to
earn a living. In this process,excess money that some people have is used for
productivepurposes. redit provides both fixed and working capital in theprocesses of
production. It helps the land less poor andunemployed youths to start enterprises.
ii.It promotes thrift and savings, which is essential fordevelopment. The money that is saved can be
used as credit;like wise, the borrower also has to save to repay the loan taken.
iii.It helps businessmen or employers and employees, at times offinancial crisis to come out of the
situation and to sustain theeconomic activities.
iv.The development plans of the country and a number ofschemes to reduce unemployment and
poverty areimplemented through banks and thus through credit.
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i.Most of the formal lenders charge a much lower interest and donot put other terms on loans. Thus,
the cost to the borrower offormal loans is much lower.
ii.Banks follow only legal measures to recover loans. In many
cases, they may even µwrite off¶ agricultural loans.
iii.heap and affordable credit is crucial for the country¶sdevelopment. It is available in banks and
cooperatives. Itreduces the dependence of rural households in the informal sector.
iv.Reserve Bank of India supervises the formal sector and issue
guidelines. (any two)
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