Money and Credit Class 10: Notes and Important Questions

Money and Credit is chapter 3 of the Class 10 Economics book. It explains why money is accepted as a medium of exchange, what modern money looks like, how banks link savers and borrowers, and why the terms and source of a loan decide whether credit helps or hurts. It ends with self-help groups and the Grameen Bank.

The whole chapter is in the CBSE 2026-27 board exam, as part of the 20-mark Economics section.

Money as a medium of exchange

Without money, people would have to barter: swap goods directly. Barter needs a double coincidence of wants, where each person has what the other wants and both agree to exchange.

A potter wants a haircut, but the barber does not want a pot. With money, the potter sells the pot to someone else and pays the barber in cash. Because money stands in the middle of every exchange, it is called a medium of exchange.

Modern forms of money

Money has changed over time: grain and cattle, then coins of gold, silver and copper, and now paper notes and coins that are not made of precious metals.

• Currency: in India, the Reserve Bank of India (RBI) issues currency notes on behalf of the central government. No other person or organisation may issue currency. The law makes the rupee a medium of payment that cannot be refused in settling transactions in India.
• Demand deposits: money kept in a bank account that can be withdrawn on demand. These deposits can be used to make payments directly, so they are also money. A cheque or a payment app is a way of using this money, not extra money.

How a cheque payment works

A cheque is a paper instructing the bank to pay a stated amount from the account holder's account to the person named on it.

In the chapter's example, M. Salim, a shoe manufacturer, has to pay his leather supplier:

1. Salim writes a cheque for the amount, instructing his bank to pay the supplier.
2. The supplier deposits the cheque in his own bank account.
3. In a couple of days the money is transferred from Salim's account to the supplier's account. Salim's balance falls and the supplier's rises.

No cash changes hands. The money simply moves from one demand deposit to another.

Loan activities of banks

Banks keep only a small part of their deposits as cash to meet withdrawals: in India these days, about 5 per cent. They use most of the rest to give loans. Banks charge borrowers a higher interest rate than they pay depositors, and this difference is their main source of income. In this way, banks connect people with spare money to people who need to borrow.

Two credit situations

Credit is an agreement in which the lender supplies money, goods or services to the borrower in return for a promise of future payment.

• Credit that helps: Salim gets an order for 3,000 pairs of shoes before the festival season. He gets leather on credit from the supplier and a cash advance from the trader for 1,000 pairs. This credit meets his working capital needs, so he delivers on time, makes a good profit and repays what he borrowed.
• Credit that hurts: Swapna, a small farmer, borrows from a moneylender to grow groundnut. Pests destroy the crop, so she cannot repay, and the debt grows. Next year's normal crop is not enough to cover the old loan, so she has to sell part of her land to clear the debt. This is a debt trap.

Whether credit helps depends on the risk involved and on whether there is any support if things go wrong.

Terms of credit

Every loan has four terms of credit:

1. Interest rate the borrower must pay along with the principal.
2. Collateral: an asset the borrower owns, such as land, a building, a vehicle or bank deposits, used as a guarantee. If the loan is not repaid, the lender can sell it.
3. Documentation the lender asks for, such as proof of employment.
4. Mode of repayment, such as monthly instalments.

In the chapter's example, Megha takes a ₹5 lakh housing loan at 12% a year for 10 years. The bank keeps her house papers as collateral until she repays.

Formal and informal sources of credit

The RBI checks that banks keep a minimum cash balance and that they lend not only to profit-making businesses and traders but also to small cultivators, small-scale industries and small borrowers.

The chapter's graph of urban households shows that 54% of the loans of poor households come from informal sources, while rich households get 83% of their loans from formal sources and only 17% from informal ones. So the poor pay more to borrow. Cheap and affordable credit matters for a country's development, which is why formal credit must expand and be shared more fairly, especially in rural areas.

Self-help groups and the Grameen Bank

A self-help group (SHG) usually has 15 to 20 members, mostly women, from one neighbourhood. They meet and save regularly; savings per member vary from about ₹25 to ₹100 or more. Members can take small loans from the group's savings. After a year or two of regular saving, the group can get a bank loan in the group's name. The group is responsible for repayment, so banks lend even though members have no collateral. SHGs also give women a place to discuss issues such as health and nutrition.

The Grameen Bank of Bangladesh, started by Professor Muhammad Yunus, lends to the poorest people, mostly women. It had over 9 million members in about 81,600 villages in 2018. Professor Yunus received the Nobel Peace Prize in 2006. The bank shows that poor women are reliable borrowers.

Remember this

• Barter needs a double coincidence of wants; money removes it.
• RBI issues currency on behalf of the central government.
• Demand deposits are money because they can settle payments.
• Terms of credit: interest rate, collateral, documentation, mode of repayment.
• Formal = banks and cooperatives, supervised by RBI. Informal = no supervision.

Important questions with answers

1. What is meant by double coincidence of wants? (1 mark) Both people in an exchange must want what the other has and agree to swap.

2. Who issues currency notes in India? (1 mark) The Reserve Bank of India, on behalf of the central government.

3. What is collateral? (1 mark) An asset owned by the borrower, such as land or a vehicle, used as a guarantee to the lender until the loan is repaid.

4. Why are demand deposits considered money? (3 marks) They can be withdrawn on demand, and they can be used to make payments directly through cheques or other bank transfers without using cash. So they work as a medium of exchange.

5. How can credit push a borrower into a debt trap? (3 marks) If the activity funded by the loan fails, as when a crop is lost to pests, the borrower cannot repay. They may take another loan or sell assets such as land, and the debt grows harder to escape.

6. Why should banks and cooperatives lend more? (3 marks) Formal loans are cheaper, so borrowers keep more of their earnings. Informal lenders charge high interest and are not supervised. More formal credit, especially for the poor, supports development.

7. Explain how self-help groups help the rural poor. (5 marks) Members save regularly and take small loans from the group at reasonable interest. After a year or two, the group can get a bank loan in its name without collateral, because the group takes responsibility for repayment. This frees members from moneylenders. SHGs also help women become financially self-reliant and give them a forum to discuss social issues.

Common mistakes to avoid

• Saying banks keep all deposits as cash. They keep only a small part and lend the rest.
• Writing that a cheque or payment app is itself money. It is an instruction to move a demand deposit.
• Saying all informal loans charge high interest. A relative may lend without interest; compare actual terms.
• Forgetting one of the four terms of credit.

To practise these answers and test yourself, study this chapter with Joy.