Money and Credit Test - 3

Bank loans require proper documents and collateral.Absence of collateral is one of the major reasons which prevents the poor from getting bank loans. Informal lenders such as moneylenders, on the other hand, know the borrowers personally and hence are often willing to give a loan without collateral. 

Grameen Bank of Bangladesh is one of the
biggest success stories in reaching the poor to meet their credit needs at reasonable rates.Started in the 1970s as a small project,
Grameen Bank now has over 6 million
borrowers in about 40,000 villages spread
across Bangladesh. Almost all of the borrowers are women and belong to poorest sections of the society. These borrowers have proved that not only are poor women reliable borrowers,but that they can start and run a variety of small income-generating activities successfully.

Money may be defined as anything which is generally accepted by the people in exchange of goods and services. It gives convenience to both seller and buyer to exchange goods which removes the need of double coincidence of wants. so, it acts as a medium of exchange in the process of buying and selling of goods.

Modern forms of money include currency- paper notes and coins. Unlike the things that were used as money earlier, modern currency is not made of precious metals such as gold, silver and copper. And unlike grain and cattle, they are neither of everyday use. The modern currency is without any use of its own.

As per Indian law, Reserve Bank of India (RBI) which was established in 1935 with a capital of Rs. 5 crore is authorised to issue currency on behalf of the central government and no other individual or organisation is allowed to issue currency.

People have the provision to withdraw the money as and when they require. Since the deposits in the bank accounts can be withdrawn on demand, these deposits are called demand deposits. A demand deposit consists of funds held in an account from which deposited funds can be withdrawn at any time from the depository institution, such as a checking or savings account, accessible by a teller, ATM or online banking. 

To pay the depositors who might come to withdraw money, banks keep certain portion of deposits as cash. Banks in India these days keep 15 percent of their deposits as cash so as to pay those depositors who come to withdraw cash from the bank on any given day. 

There is a huge demand for loans for various economic activities. So, banks use the major portion of the deposits to meet the loan requirements of the people.

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. In order to increase their income banks increase the gap between the interest charged on borrowers and depositors. 

In rural areas people are mostly associated with agriculture. Crop production involves considerable costs on seeds, fertilisers, pesticides, water, electricity, repair equipment, etc. To fulfill these needs farmers in rural areas take loan.