NCERT CBSE Class 10 Chapter 3 Economics Notes: Money and Credit (Free PDF) 

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NCERT CBSE Class 10 Chapter 3 Economics Notes Money and Credit

In CBSE Class 10 Economics Chapter 3 – Money and Credit, students delve into the concept of modern forms of money and their relationship with the banking system. The chapter also explores credit and how it affects borrowers differently depending on their circumstances. 

These notes provide a comprehensive understanding of these crucial topics, aiding students in grasping the intricacies of money and credit in today’s economic framework.

Download NCERT CBSE Class 10 Economics Chapter 3 Notes: Money and Credit 
CBSE Class 10 Economics Chapter 3 NCERT Solutions: Money and Credit

Money as a Medium of Exchange

Money serves as an intermediary in the exchange process, functioning as a medium of exchange. This means that individuals can use money to easily trade for any goods or services they need. 

Unlike the barter system, where the direct exchange of goods and services requires a mutual coincidence of wants, money provides a common measure of value, making transactions more efficient and convenient. 

By holding money, individuals have the flexibility to purchase what they need when they need it, facilitating smoother and more dynamic economic activity. Additionally, money also acts as a store of value and a unit of account, further supporting its role in modern economies.

Modern Forms of Money

In the early ages, Indians used grains and cattle as forms of money. This barter system was later replaced by the use of metallic coins made from gold, silver, and copper, a practice that persisted well into the last century. 

Today, modern forms of money include currency, such as paper notes and coins. Additionally, modern money encompasses bank deposits, which are integral to the contemporary banking system. 

These modern forms of money are closely connected to how banks operate, as they facilitate transactions and the management of savings and credit within the economy.


In India, the Reserve Bank of India (RBI) is the sole authority responsible for issuing currency notes on behalf of the central government. No other individual or organisation is permitted to issue currency. The Indian rupee is universally accepted as a medium of exchange across the country, facilitating trade and economic transactions by providing a consistent and reliable form of money.

Deposits in Banks

Another common way people hold money is through bank deposits. Individuals deposit their extra cash into banks by opening bank accounts in their names. Banks accept these deposits and, in return, pay interest on the deposited amounts.

Deposits that can be withdrawn on demand are known as demand deposits. These deposits provide flexibility and convenience, as payments can be made using cheques instead of cash. A cheque is a written instruction to the bank, directing it to pay a specified amount from the account holder’s account to the person named on the cheque.

This system facilitates secure and efficient transactions, reducing the need to carry large amounts of cash.

Loan Activities of Banks

Banks retain only a small proportion of their deposits as cash, typically about 15% in India. This cash reserve is maintained to meet the withdrawal demands of depositors. The majority of the deposits are used by banks to extend loans, catering to the high demand for credit in various economic activities.

Banks charge a higher interest rate on loans than the interest they pay on deposits. This difference between the interest received from borrowers and the interest paid to depositors constitutes the main source of income for banks. This income enables banks to cover operational costs and generate profits while supporting economic growth through lending.

Two Different Credit Situations

Credit (loan) refers to an agreement where the lender supplies the borrower with money, goods, or services in return for a promise of future payment.

Here are two examples to help you understand how credit works:
Festive Season:
Salim obtains credit to meet the working capital needs for his production. The credit enables him to cover ongoing production expenses, ensuring he can complete production on time. As a result, Salim’s earnings increase, making him better off than before. In this situation, credit is beneficial as it helps boost earnings and supports economic activity.

Swapna’s Problem:
Swapna faces a different outcome. She takes out a loan to fund her agricultural activities, but the failure of her crop makes it impossible for her to repay the loan. Consequently, she is forced to sell part of her land to repay the debt. Instead of improving her earnings, credit leads Swapna into a debt trap, worsening her financial situation. 

This example highlights the risks associated with credit, where unfavourable circumstances can push borrowers into severe financial distress. The utility of credit depends on the risks involved and the availability of support in case of losses.

Also Read: NCERT Class 7 Civics Chapter 8 ‘A Shirt in the Market’: Notes and Solutions (Free PDF)

Terms of Credit

Every loan agreement specifies an interest rate that the borrower must pay to the lender in addition to repaying the principal amount. Furthermore, lenders often require collateral as security against the loan.

Collateral (security) refers to an asset that the borrower owns, such as land, a building, a vehicle, livestock, or deposits with banks, and is used as a guarantee to the lender until the loan is fully repaid. If the borrower fails to repay the loan, the lender has the right to sell the collateral to recover the owed amount.

The interest rate, collateral, documentation requirements, and mode of repayment are collectively known as the terms of credit. These terms can vary depending on the nature of both the lender and the borrower, reflecting the specific conditions and risks associated with the loan agreement.

Formal Sector Credit in India

Access to cheap and affordable credit is crucial for a country’s development. Loans can generally be categorised into formal sector loans and informal sector loans:

Formal Sector Loans:
These loans are provided by banks and cooperatives, which are regulated and supervised by the Reserve Bank of India (RBI). Banks are required to report their lending activities to the RBI, including details such as the amount lent, to whom it was lent, the interest rate charged, and other relevant information. Formal sector loans typically adhere to regulatory standards and provide transparency in lending practices.

Informal Sector Loans:
Informal sector loans, on the other hand, come from sources like moneylenders, traders, employers, relatives, and friends. Unlike formal sector loans, there is no overarching organization that regulates or supervises the credit activities of lenders in the informal sector. This lack of oversight can lead to informal lenders using unfair practices to recover their money, which may disadvantage borrowers.
The availability of formal sector loans, with their regulated framework and transparency, helps ensure that borrowers have access to credit under more structured and potentially more favorable terms. 
Conversely, informal sector loans, while often more accessible in certain situations, can carry higher risks and costs due to the lack of regulatory oversight and formal protections for borrowers.

Formal and Informal Credit
In rural areas, only about half of the total credit needs of people are met by the formal sector, such as banks and cooperatives. The remaining credit needs are fulfilled through informal sources like moneylenders, traders, and relatives. This reliance on informal credit often results in higher costs and risks for borrowers.

It is crucial to ensure that formal credit is distributed more equitably so that individuals, especially those in rural areas and from lower-income groups, can access cheaper loans. Banks and cooperatives should increase their lending activities in rural regions to reduce dependency on informal sources of credit. 

This expansion of formal sector loans not only helps in lowering the cost of credit but also enhances financial inclusion by providing more people with access to regulated and transparent financial services.

Furthermore, it’s essential to ensure that formal sector loans are accessible to all segments of society, including marginalised communities and small farmers. This requires proactive measures to address barriers such as lack of awareness, documentation requirements, and geographical limitations that may hinder access to formal credit.

By promoting equitable distribution and accessibility of formal sector loans, policymakers can mitigate the risks associated with informal credit, promote economic stability, and support sustainable development in rural areas and beyond.

Self-Help Groups for the Poor

Poor households in rural India often rely on informal sources of credit due to several challenges associated with accessing formal sector loans:

1. Limited Presence of Banks: Banks are not uniformly distributed across rural areas. Many villages and remote locations do not have direct access to bank branches, making it difficult for residents to access formal financial services.

2. Documentation and Collateral Requirements: Even where banks are present, obtaining a loan can be challenging for poor households. Banks typically require extensive documentation and collateral as security, which many poor individuals may not possess. This makes formal loans inaccessible or impractical for those without regular income or tangible assets.

Communities have established Self Help Groups (SHGs) to address these barriers. SHGs are small, community-based groups comprising 15-20 members who come together to encourage savings and provide mutual support. 

Members of SHGs pool their savings regularly and can access loans from the group’s savings fund. SHGs empower members by promoting financial discipline, fostering collective decision-making, and providing a platform to access affordable credit without stringent formalities.

By leveraging the collective strength of group savings and mutual trust, SHGs enable poor households to access credit for various needs, such as agriculture, small business ventures, education, and healthcare. 

This grassroots approach helps overcome the challenges associated with formal banking systems, promotes financial inclusion, and empowers marginalized communities to improve their socio-economic status.

Advantages of Self-Help Groups (SHG)
Self Help Groups (SHGs) offer multifaceted benefits to their members, particularly in rural areas:

1. Collateral-Free Access to Loans: SHGs empower borrowers by providing access to loans without the traditional requirement of collateral. This accessibility bridges the gap for individuals who lack assets typically demanded by formal financial institutions.

2. Timely and Affordable Loans: Members can obtain loans promptly for diverse needs, including agricultural expenses, small businesses, education, and emergencies. The interest rates are reasonable and collectively determined by the group, ensuring affordability for borrowers.

3. Foundation for Rural Community Development: SHGs serve as foundational units for organising and uplifting the rural poor. They foster solidarity among members, enhance financial literacy, and promote collective decision-making, laying the groundwork for sustainable community development.

4. Empowerment of Women: SHGs play a pivotal role in empowering women by fostering financial independence. Through active participation, women gain confidence, and leadership skills, and contribute significantly to household incomes and decision-making processes.

5. Platform for Addressing Social Issues: Regular group meetings provide a vital platform for discussing and addressing a wide array of social issues. These discussions encompass topics such as healthcare, nutrition, education, and domestic violence, enabling collective action and community support.

In essence, SHGs not only facilitate economic empowerment but also serve as catalysts for social cohesion and development in rural areas. They exemplify the effectiveness of community-driven initiatives in promoting inclusive growth and improving the quality of life among marginalised populations.

Also Read: NCERT Class 6 Civics Chapter 6 ‘Urban Administration’: Notes and Solutions (Free PDF)


Q.1. What are money and credit in short notes?

Ans: Money and credit facilitate economic transactions. Money is a universally accepted medium of exchange in the form of currency and deposits, allowing people to buy goods and services. Credit, on the other hand, is an agreement where a lender provides money or resources to a borrower with the promise of future repayment.

Q.2: What is money and credit according to the class 10 notes on the barter system?

Ans: According to Class 10 notes, before the introduction of money, people relied on the barter system for trade. In this system, goods and services were exchanged directly without using money. It required a double coincidence of wants, where both parties had to desire what the other had to offer.

Q.3: How money is a medium of exchange as per class 10 notes?

Ans: Money acts as a medium of exchange by simplifying transactions. It eliminates the need for direct barter by providing a common measure of value. People can easily trade money for goods and services because it is universally accepted and recognized as valuable. This makes economic transactions more efficient and convenient for everyone involved.

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