MONEY
&
CREDIT
Credit
Q What is Credit?
 An agreement in which the lender agrees to supply the borrower with
money, goods or services in return for the promise of future
payment.
 It is a contractual agreement.
There are two forms of credit:
1) Informal Credit Sector
2) Formal Credit Sector
Informal Credit Sector
 One of the ancient credit systems in India.
 This sector involves indigenous bankers and moneylenders.
 Easily accessible by the small & poor borrowers in both
rural& urban areas.
 Simplified procedures & quick delivery of credit.
 Heavy rate of interest sometimes leads to exploitation of
the poor borrower.
 Transaction costs are low / Repayment rates are high
formal Credit Sector
 Comprises of recognized banks & cooperatives.
 Many procedures & formalities leads to delay in obtaining
credit.
 Interest rates are low. Main objectives of Formal sector is
welfare of the people and not the profits.
 People are not exploited.
 Regulated & supervised by Reserve Bank of India.
Banks
Q What is banking?
 Banking can be defined as the business activity of accepting and
safeguarding money owned by other individuals and entities, and
then lending out this money.
 Bank is a financial institution which does banking.
 In 1865, "Allahabad Bank" was established. This bank is now
considered as the oldest surviving bank in India.
Importance of banks
 Banks play an important role in development of the economy.
 Encourages savings by offering attractive interest rates.
 Provide loans.
 Helps in the development of agriculture & industries.
 Provide convenient way of payment through the cheque system.
 Offer services like DD, Credit & Debit cards, online banking, online
business transactions.
Industrial Banks
 Provide both short-term & long-term loans to industries.
 Lend money for long periods & provide fixed capital.
Exchange Banks
 Deal in foreign currency and foreign trade.
 Accept & collect foreign bills of exchange.
Savings Banks
 Mobilization of small savings of the individuals.
Co-operative Banks
 Registered under the ‘Co-operative Societies Act’.
 Confine their activities to their members only.
Mortgage Banks
 Mortgage banks give long-term loans to agriculturists to carry out
permanent improvements on land, such as drainage, irrigation, farm
buildings etc.
 Also called ‘Land Development Banks’
Reserve Bank of India
 Central Bank of India governed by Government of India.
 Established on 1st April 1935. Nationalized on 1st January 1949.
Raghuram Rajan
TRADITIONAL
Functions of RBI
 Issue of Currency Notes.
 Banker to other Banks.
 Banker to the Government.
 Exchange Rate Management.
 Credit Control Function.
 Supervisory Function.
Developmental
Functions of RBI
 Development of the Financial System.
 Development of Agriculture.
 Provision of Industrial Finance.
 Collection of Data.
 Promotion of Banking Habits.
 Promotion of Export through Refinance.
Supervisory
Functions of RBI
 Granting license to banks.
 Bank Inspection .
 Implementation of the Deposit Insurance Scheme.