Barter, money, banking, formal vs informal credit, self-help groups, and credit problems
Barter system: Goods exchanged directly for other goods. Problem: Needs a "double coincidence of wants" — both parties must want what the other has. Very inefficient!
Example: A farmer with wheat who wants shoes must find a shoemaker who wants wheat AND has shoes to give. What are the odds?
Money solves this: Money is a medium of exchange accepted by everyone. Farmer sells wheat for money → uses money to buy shoes from any shoemaker. No coincidence needed!
• Medium of exchange: Used to buy and sell goods/services
• Unit of account: Prices expressed in monetary units (₹)
• Store of value: Save money for future use (unlike perishable goods)
• Standard of deferred payment: Loans given and repaid in money
Credit refers to loans provided to individuals or businesses in exchange for a promise of repayment with interest.
Credit is vital for economic activity — farmers need credit to buy seeds/fertilisers, businesses need credit to expand, students need education loans.
Terms of credit:
• Interest rate (cost of borrowing)
• Collateral (security/asset pledged against loan)
• Mode of repayment (EMI, lump sum)
• Documentation requirements
Good credit (helps): A farmer borrows ₹50,000 to buy quality seeds and fertilisers → gets good harvest → earns ₹80,000 → repays loan + keeps profit. Credit became the basis of prosperity!
Debt trap (harms): Same farmer's crop fails due to drought → cannot repay loan → moneylender seizes land. Now the farmer is landless. Credit became a source of ruin!
The same credit can lead to very different outcomes depending on how it is used and what happens.
| Formal Credit | Informal Credit |
|---|---|
| Banks, cooperatives, government schemes | Moneylenders, traders, landlords, friends/family, chit funds |
| RBI regulates; interest rates controlled | No regulation; interest rates very high (24–48%+) |
| Collateral required (assets, documentation) | No formal collateral needed — social pressure/coercion used |
| Protects borrower's rights | Exploitative; terms unfair; no legal protection |
| Large loans possible | Small loans; for emergency/immediate needs |
Banks require collateral (land, gold, property) that poor people often don't have. They also need documentation (income proof, credit history) that informal workers can't provide.
Result: Poor people are forced to borrow from informal moneylenders at 5–10× higher interest rates → debt traps → poverty deepens.
A Self-Help Group is a small group (usually 15–20 women) who save regularly and pool their money. When a member needs a loan, they borrow from the group's pool at low interest.
After establishing a credit history, the SHG can borrow as a group from a bank → each member gets larger loans at low rates.
Benefits: Reduces dependence on moneylenders; promotes women's empowerment and decision-making; supports income-generating activities
Famous example: Grameen Bank (Bangladesh) — Nobel Prize winning model that inspired SHG movements worldwide.