Money & Credit – NTSE Social Science Study Notes
1. Simple Explanation
| Concept | What it means |
|---|---|
| Money | Anything that is accepted universally as a medium of exchange, a unit of account, and a store of value. |
| Credit | The right to obtain goods or services now and pay for them later, usually with interest. Credit is created by financial institutions or by informal lending. |
Money and credit are the two engines of a modern economy. Money makes transactions easier, while credit expands the purchasing power of individuals and firms.
2. Key Points
2.1 Money
| Aspect | Details |
|---|---|
| Functions | 1. Medium of exchange 2. Unit of account 3. Store of value 4. Standard of deferred payment |
| Characteristics | • Acceptable by all • Durable • Divisible • Portable • Portable (in digital form) • Non‑fungible (currency) |
| Types | • Commodity money – gold, silver, salt • Fiat money – paper notes & coins backed by the government • Electronic money – bank‑deposits, mobile wallets |
| Forms | • Physical (coins, notes) • Digital (bank balances, UPI, crypto) |
| Role in Economy | • Facilitates trade • Enables price discovery • Supports savings & investment • Acts as a policy tool (monetary policy, interest rates) |
2.2 Credit
| Aspect | Details |
|---|---|
| Definition | The ability to borrow money or goods with the promise to repay later, usually with interest. |
| Types of Credit | • Consumer credit – credit cards, personal loans • Business credit – working‑capital loans, overdrafts • Mortgage credit – home loans • Government credit – subsidies, bonds |
| Credit System | • Formal – banks, NBFCs, credit cooperatives • Informal – moneylenders, friends/family (high interest) |
| Credit Instruments | • Loans – term, revolving, installment • Credit cards – revolving credit • Bills of exchange – promissory notes |
| Importance | • Expands consumption beyond current savings • Fuels investment & economic growth • Provides liquidity to businesses |
| Issues | • Over‑indebtedness • High/variable interest rates • Credit risk & default • Regulatory gaps in informal sector |
2.3 Interaction Between Money & Credit
| Interaction | Explanation |
|---|---|
| Credit creates money | When banks issue a loan, they credit the borrower’s account, effectively creating a deposit. |
| Money multiplier | The banking system expands the amount of money in circulation through lending. |
| Monetary policy | Central bank controls money supply and interest rates, directly influencing credit availability. |
2.4 Recent Trends (2023‑2024)
| Trend | Description |
|---|---|
| Digital Payments | UPI, BHIM, Paytm: faster, traceable, reduce cash usage. |
| Peer‑to‑Peer Lending | Platforms like LendingClub, Kabbage connect borrowers with investors. |
| Regulatory Tech (RegTech) | Helps banks monitor compliance and reduce risk. |
| Impact of COVID‑19 | Central banks injected liquidity; credit lines extended to SMEs. |
| Green Credit | Loans with environmental criteria, promoting sustainable projects. |
3. Worked Example
Problem
A bank gives a ₹50,000 loan to a customer at an annual interest rate of 8 % (simple interest) for 3 years.
What is the total amount the customer has to repay?
Solution
| Step | Calculation | Result |
|---|---|---|
| 1. Compute interest | ||
| (I = Principal \times Rate \times Time) | ||
| (= 50{,}000 \times 0.08 \times 3) | (I = ₹12{,}000) | |
| 2. Compute total repayment | ||
| (Total = Principal + Interest) | ||
| (= 50{,}000 + 12{,}000) | (Total = ₹62{,}000) |
Answer: The customer repays ₹62,000 after 3 years.
Alternate: Money Multiplier
If the reserve ratio is 10 %, the money multiplier (m = \frac{1}{Reserve Ratio}).
(m = \frac{1}{0.10} = 10).
If the central bank injects ₹1 crore of reserves, the potential increase in money supply is (₹1 \text{ crore} \times 10 = ₹10 \text{ crores}).
4. Quick Revision Summary
| Topic | Points to Remember |
|---|---|
| Money | • Medium of exchange, unit of account, store of value, standard of deferred payment. • Fiat, commodity, digital forms. |
| Characteristics | • Acceptable, durable, divisible, portable, non‑fungible (currency). |
| Credit | • Borrowing with promise to repay + interest. • Consumer, business, mortgage, government types. |
| Credit System | • Formal (banks, NBFCs) vs informal (moneylenders). |
| Credit Instruments | • Loans |