Money and Credit

Why this chapter matters for UPSC: The chapter gives the basic vocabulary of money and banking that later questions take for granted: medium of exchange, double coincidence of wants, demand deposits, collateral, terms of credit, formal and informal credit, self-help groups. Its argument, that cheap formal credit must reach the poor, sits under Mains questions on self-help groups and microfinance (GS2) and on financial inclusion, Jan Dhan and rural credit (GS3).

Contemporary hook: In 2025-26 the Unified Payments Interface (UPI) handled over 24,162 crore transactions worth about ₹314 lakh crore, and 703 banks were live on it in March 2026 (PIB, 30 April 2026). Jan Dhan accounts numbered 55.02 crore in March 2025, and by December 2025 10.05 crore rural households had been organised into 90.90 lakh self-help groups under DAY-NRLM (Economic Survey 2025-26). NCERT's own graph now shows formal lenders supplying two-thirds of rural credit in 2019, up from 56% in 2012 in the previous edition.

🧠 First Principles — Read This First

Money removes the need for a double coincidence of wants. Under barter, a shoe manufacturer who wants wheat must find a farmer who "not only wants to sell wheat but also wants to buy the shoes in exchange." Money, "by providing the crucial intermediate step eliminates the need for double coincidence of wants". That is why NCERT calls it a medium of exchange.

Modern money is currency plus demand deposits. Paper notes and coins have no use of their own. They are accepted "because the currency is authorised by the government of the country." Bank deposits that can be withdrawn on demand and paid out by cheque "share the essential features of money".

Banks lend most of what they receive. They keep "only a small proportion of their deposits as cash" and "use the major portion of the deposits to extend loans". The difference between the interest charged to borrowers and the interest paid to depositors "is their main source of income."

Credit can lift a borrower or sink one. Salim's loan lets him finish a festival order and earn more; Swapna's loan, after her crop fails, forces her to sell part of her land. "Whether credit would be useful or not, therefore, depends on the risks in the situation and whether there is some support, in case of loss."

The poor pay the most for credit. Formal lenders (banks and cooperatives) are cheaper but ask for collateral and documents; informal lenders cost more and nobody supervises them. Self-help groups let poor women borrow from banks without collateral, because the group answers for every loan.

PART 1 — Quick Reference

Table 1: Forms of money in NCERT

Source: NCERT, Understanding Economic Development, Class X, ch. 3 "Money and Credit", Reprint 2026-27, pp. 40-41. "As per Indian law, no other individual or organisation is allowed to issue currency."

Table 2: Two credit situations (NCERT's table, p. 44)

Source: NCERT, ch. 3, Reprint 2026-27, pp. 43-44. NCERT's table has three rows (why credit was needed, the risk, the outcome) for students to fill; we fill them from its two stories, add the row "Who lent?", and Salim's risk is our reading. NCERT's verdict on Salim: "Credit therefore plays a vital and positive role in this situation."

Table 3: Megha's housing loan, or what "terms of credit" means (p. 45)

Source: NCERT, ch. 3, Reprint 2026-27, p. 45. "Interest rate, collateral and documentation requirement, and the mode of repayment together comprise what is called the terms of credit."

Table 4: Credit arrangements in Sonpur (diary of 15 November 2019)

Source: NCERT, ch. 3, Reprint 2026-27, pp. 46-47. Rama: "the only source of credit for the landless people in Sonpur are the landowner-employers."

Table 5: Sources of credit for rural households, 2012 and 2019 (NCERT Graph 1, two editions)

Source: NCERT, ch. 3, Reprint 2026-27, p. 48, Graph 1 "Sources of Credit in Rural India, 2019"; 2020-21 edition, Graph 1 "Sources of Credit per Rs 1000 of Rural Households in India in 2012". The teachers' notes name the All India Debt and Investment Survey of the National Sample Survey Organisation, now the National Statistical Office: "77 th Round 2019" in the reprint and "70 th Round 2013" in the old edition. The totals are our arithmetic. The two graphs label lenders slightly differently, so compare the totals and the two largest sources, not every slice.

Table 6: Formal and informal loans of urban households (NCERT Graph 2)

Source: NCERT, ch. 3, Reprint 2026-27, p. 49, Graph 2 "Of all the loans taken by urban households, what percentage was formal and what percentage was informal?" (four pie charts). NCERT prints no year for this graph. In the 2020-21 edition, 85 per cent of poor urban households' loans were informal, against 10 per cent for rich households. NCERT adds: "A similar pattern is also found in rural areas."

Table 7: Self-help groups in NCERT

Source: NCERT, ch. 3, Reprint 2026-27, p. 51. Uses NCERT lists: releasing mortgaged land, working capital (seeds, fertilisers, bamboo, cloth), housing materials, and assets such as sewing machines, handlooms and cattle.

Table 8: Formal credit and payments in India now (beyond the book)

Sources: PIB, Ministry of Finance, "UPI at 10", 30 April 2026; Economic Survey 2025-26, chs. 3, 6 and 13 (Table XIII.1 cites the Ministry of Rural Development); pmjdy.gov.in, Department of Financial Services (the counter carries no date of its own); PIB backgrounder on PM SVANidhi, 30 May 2026; PIB, Ministry of Finance, Mudra loan limit, 25 October 2024. Links under Sources.

PART 2 — Concepts & Narrative

Money as a medium of exchange

Look at any day and you will find many transactions involving money: goods bought and sold, services paid for, and some where there is only "a promise to pay money later." NCERT's question is why transactions are made in money at all. "A person holding money can easily exchange it for any commodity or service that he or she might want."

Take the shoe manufacturer who wants to sell shoes and buy wheat. Without money he "would have to look for a wheat growing farmer who not only wants to sell wheat but also wants to buy the shoes in exchange." Both sides must want what the other has: "This is known as double coincidence of wants." In a barter system it is "an essential feature". With money, he only has to find a buyer for his shoes; he can then buy wheat or anything else. "Since money acts as an intermediate in the exchange process, it is called a medium of exchange."

Modern forms of money

Before coins, "a variety of objects was used as money": grains and cattle in India "since the very early ages", then gold, silver and copper coins, "a phase which continued well into the last century." Modern money is different. Paper notes and coins are not made of precious metal, and unlike grain and cattle they are not of everyday use: "The modern currency is without any use of its own."

Currency. It is accepted "because the currency is authorised by the government of the country. In India, the Reserve Bank of India issues currency notes on behalf of the central government." No one else may issue currency, and "the law legalises the use of rupee as a medium of payment that cannot be refused in settling transactions in India." Exercise 4 asks students to look at a 10 rupee note and explain what is written on top.

Deposits with banks. People need only some cash for day-to-day needs. A worker paid at the end of the month has extra cash at the start of it, and deposits it in a bank account, where it is safe and earns interest. "Since the deposits in the bank accounts can be withdrawn on demand, these deposits are called demand deposits."

Cheques. "A cheque is a paper instructing the bank to pay a specific amount from the person's account to the person in whose name the cheque has been issued." When the shoe manufacturer M. Salim pays his leather supplier by cheque, the supplier deposits it and the money moves between the two accounts "in a couple of days." No cash changes hands. "Thus we see that demand deposits share the essential features of money." NCERT's conclusion: "The modern forms of money — currency and deposits — are closely linked to the working of the modern banking system."

Loan activities of banks

What do banks do with deposits? "Banks keep only a small proportion of their deposits as cash with themselves. For example, banks in India these days hold about 5 per cent of their deposits as cash." This is enough because on any day only some depositors come to withdraw. "Banks use the major portion of the deposits to extend loans."

So banks "mediate between those who have surplus funds (the depositors) and those who are in need of these funds (the borrowers)." They charge a higher interest rate on loans than they pay on deposits, and that difference "is their main source of income." NCERT ends the section with a question worth discussing: "What do you think would happen if all the depositors went to ask for their money at the same time?"

Two different credit situations

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

Salim's festival order. Two months before the festival season, a large trader orders 3,000 pairs of shoes from Salim, to be delivered in a month. He needs more workers and raw materials, so he borrows twice: the leather supplier gives him leather now against later payment, and the trader pays an advance for 1,000 pairs. He delivers on time, makes a good profit and repays. "In this case, Salim obtains credit to meet the working capital needs of production."

Swapna's problem. Swapna, a small farmer, borrows from the moneylender to grow groundnut on her three acres. Pests destroy the crop midway; expensive pesticides make little difference. The debt grows. The next year's crop is normal, but the earnings do not cover the old loan. "She has to sell a part of the land to pay off the debt."

"In rural areas, the main demand for credit is for crop production." Seeds, fertilisers, pesticides, water, electricity and repairs must be paid for, and "There is a minimum stretch of three to four months between the time when the farmers buy these inputs and when they sell the crop." So repayment "is crucially dependent on the income from farming."

Terms of credit

Every loan agreement fixes an interest rate, paid along with the principal, and lenders may ask for collateral. "Collateral is an asset that the borrower owns (such as land, building, vehicle, livestocks, deposits with banks) and uses this as a guarantee to a lender until the loan is repaid." If the borrower fails to repay, "the lender has the right to sell the asset or collateral to obtain payment."

Megha's housing loan (Table 3) shows all the terms at once: amount, duration, documents, interest rate, mode of repayment and collateral. "The terms of credit vary substantially from one credit arrangement to another. They may vary depending on the nature of the lender and the borrower."

Variety of credit arrangements: Sonpur

Two students, Rohit and Ranjan, decide to talk to people in their own village, Sonpur, "a small irrigated village", and record what they hear on "15th Nov, 2019" (Table 4).

Shyamal, a small farmer with 1.5 acres, used to pay the village moneylender "five per cent per month (60% per annum)". Now he borrows from an agricultural trader at three per cent a month. The trader supplies inputs on credit, to be repaid at harvest, and "also makes the farmers promise to sell the crop to him." Since crop prices are low after harvest, the trader profits by buying cheap and selling later "when the price has risen."

Arun, with seven acres, "is one of the few persons in Sonpur to receive bank loan for cultivation", at 8.5 per cent a year, repayable within three years. He will repay after harvest by selling part of the crop, store the rest in a cold storage, and take a fresh bank loan against the cold storage receipt.

Rama, an agricultural labourer, has no work for several months a year and borrows for daily expenses, illnesses and family functions. Her employer, a medium landowner, charges "5 per cent per month". She repays by working for him and owes him Rs 5,000. "Though the landowner doesn't treat her well, she continues to work for him since she can get loans from him when in need."

Cooperatives. "Besides banks, the other major source of cheap credit in rural areas are the cooperative societies (or cooperatives)." Krishak Cooperative, near Sonpur, has 2,300 farmer members. It accepts their deposits, uses them as collateral for a large bank loan, and lends to members; "Once these loans are repaid, another round of lending can take place."

NCERT exercise 6 (p. 47): (i) Over the years Rama's debt will rise; (ii) Arun is one of the few bank borrowers in Sonpur because banks demand collateral which everyone cannot provide.

Formal sector credit in India

NCERT groups loans into two kinds. "Among the former are loans from banks and cooperatives. The informal lenders include moneylenders, traders, employers, relatives and friends, etc."

"The Reserve Bank of India supervises the functioning of formal sources of loans." It checks that banks actually maintain their cash balance, it sees that they lend "not just to profit-making businesses and traders but also to small cultivators, small scale industries, to small borrowers etc.", and banks must report periodically "on how much they are lending, to whom, at what interest rate, etc." By contrast, "There is no organisation which supervises the credit activities of lenders in the informal sector." Informal lenders can charge any rate and use unfair means to recover money.

Informal credit costs more, so a larger part of the borrower's earnings goes in repayment (Shyamal); sometimes the amount due exceeds the borrower's income, and debt keeps rising (Rama). People who might start an enterprise may not do so because borrowing is expensive. Hence, "banks and cooperative societies need to lend more." "Cheap and affordable credit is crucial for the country's development."

Who gets what? In Graph 1 (Table 5), commercial banks were the largest single source of rural credit in 2019 at 51%, and formal sources together gave 66%; moneylenders gave 23%. Graph 2 (Table 6) shows that "54 per cent of the loans taken by poor households in the urban areas are from informal sources", against "Only 17 per cent" for rich households, "while 83 per cent are from formal sources." "The rich households are availing cheap credit from formal lenders whereas the poor households have to pay a large amount for borrowing."

NCERT draws two lessons. First, formal credit needs to expand, because informal loans "carry a very high interest rate and do little to increase the income of the borrowers." Second, "it is important that the formal credit is distributed more equally so that the poor can benefit from the cheaper loans."

Self-help groups for the poor

Why do poor households still depend on informal lenders? "Banks are not present everywhere in rural India." Where they are, bank loans need documents and collateral, as Megha's did. "Absence of collateral is one of the major reasons which prevents the poor from getting bank loans." Moneylenders know their borrowers and will lend without collateral, even before an earlier loan is repaid, but they "charge very high rates of interest, keep no records of the transactions and harass the poor borrowers."

The newer approach is "to organise rural poor, in particular women, into small Self Help Groups (SHGs) and pool (collect) their savings" (Table 7). Members borrow from the group at less than the moneylender's rate; after a year or two of regular saving the group can borrow from a bank, in its own name, to create self-employment. The group decides who borrows, for what and on what terms, and follows up any default. "Because of this feature, banks are willing to lend to the poor women when organised in SHGs, even though they have no collateral as such."

"Thus, the SHGs help borrowers overcome the problem of lack of collateral." More than that, "SHGs are the building blocks of organisation of the rural poor." They help women become financially self-reliant, and regular meetings give a platform to discuss "health, nutrition, domestic violence, etc." NCERT's photograph shows a women's self-help group meeting in Gujarat.

Grameen Bank of Bangladesh

"Grameen Bank of Bangladesh is one of the biggest success stories in reaching the poor to meet their credit needs at reasonable rates." It "Started in the 1970s as a small project", and in 2018 had "over 9 million members in about 81,600 villages spread across Bangladesh." "Almost all of the borrowers are women and belong to poorest sections of the society", and they have shown that poor women are reliable borrowers who can run small income-generating activities. NCERT quotes its founder, Professor Muhammad Yunus, "recipient of 2006 Nobel Prize for Peace":

"If credit can be made available to the poor people on terms and conditions that are appropriate and reasonable these millions of small people with their millions of small pursuits can add up to create the biggest development wonder."

NCERT's teachers' note adds a caution: such interventions are worth knowing, "but it is important to realise that we don't have answers to all questions."

What the pre-2023 edition said

The chapter's argument and stories are the same; the data and two notes differ. In the 2020-21 edition:

• Cash with banks. "banks in India these days hold about 15 per cent of their deposits as cash" (now "about 5 per cent").
• Graph 1. "Sources of Credit per Rs 1000 of Rural Households in India in 2012": formal sources 56% (commercial banks 25%, cooperatives 25%), moneylenders 33% (Table 5). The "about half" sentence matched that graph.
• Graph 2. 85 per cent of poor urban households' loans were informal; rich households 10 per cent informal and 90 per cent formal.
• Teachers' note. It named the "All India Debt and Investment Survey, 70 th Round 2013"; listed digital payments as "cheques, ATM cards, credit cards, and Point of Sale (POS) swipe machines at shops", without QR codes or UPI; asked for a debate on demonetisation (the reprint adds "and digitalisation"); and added that areas such as "'creation of money' (money multiplier)" were not covered but "may be discussed if you desire". The reprint drops that last sentence.
• Unchanged. The Sonpur diary of "15th Nov, 2019", the SHG passage (15-20 members, Rs 25 to Rs 100), the Grameen Bank figures for 2018 and Exercise 11's "about 80 per cent of farmers are small farmers" are the same in both.

Source: NCERT, Understanding Economic Development, Class X, ch. 3, 2020-21 edition (as archived by the Wayback Machine, 9 October 2021).

PART 3 — UPSC Integration

Frames for Mains Answers

1. "Role of self-help groups in empowering rural women." Start from NCERT's mechanism: pooled savings, group lending, group responsibility for repayment, so banks lend without collateral; SHGs as "building blocks of organisation of the rural poor" and a platform for health, nutrition and domestic violence. Scale: 90.90 lakh SHGs, 10.05 crore households, ₹11.92 lakh crore of bank credit (DAY-NRLM, till December 2025). Add NCERT's caution that "we don't have answers to all questions."

2. "Financial inclusion and inclusive growth." NCERT's two lessons: expand formal credit, and distribute it more equally. Evidence: rural formal credit rose from 56% (2012) to 66% (2019) in NCERT's graphs, but 34% was still informal; poor urban households took 54% of their loans informally. Instruments: Jan Dhan (55.02 crore accounts, March 2025), UPI, Kisan Credit Card, Mudra, SVANidhi.

3. "Why does the moneylender survive?" Sonpur gives the answer: no collateral needed, personal knowledge of the borrower, credit tied to work (Rama) or to the sale of the crop (Shyamal), and banks that are absent or ask for documents. The costs: 60% a year against a bank's 8.5%, debt traps, no records, harassment, and no supervisor.

4. "Should informal lenders be regulated?" NCERT asks this itself: should a supervisor such as the RBI look into informal lending, and "Why would its task be quite difficult?" Informal loans are unrecorded, personal and tied to work or crops. The more workable route is NCERT's: make formal credit cheaper and easier to reach than informal credit.

5. "Credit: a ladder or a trap?" Salim against Swapna: credit helps when it finances production with manageable risk, and traps when a shock (crop failure) meets high interest and no support. Policy follows: crop insurance and support "in case of loss", cheap formal credit, and group lending.

Exam Strategy

Prelims fact-traps:

• The Reserve Bank of India issues currency notes on behalf of the central government (NCERT).
• Demand deposits are money; NCERT's teachers' note says plastic cards are "not all of them money per se".
• Cooperatives are formal lenders; employers, traders, moneylenders, relatives and friends are informal (NCERT Exercise 13).
• UPI was launched on 11 April 2016 by NPCI, under the RBI's regulatory oversight; it is not run by the RBI.
• The CRR is 3.00% of net demand and time liabilities (as on 5 October 2026). NCERT's "about 5 per cent of their deposits as cash" illustrates the idea; it is not the CRR.
• NCERT Graph 1 (2019): formal sources 66% of rural credit, commercial banks 51%, moneylenders 23%.
• A typical SHG in NCERT has 15-20 members; bank loans come after a year or two of regular saving.
• Mudra's loan limit was raised from ₹10 lakh to ₹20 lakh (announced in Union Budget 2024-25, notified October 2024); the new Tarun Plus category covers loans above ₹10 lakh.

Practice Questions

Questions 1-2 are NCERT's in-text questions (pp. 42 and 47); questions 3-4 are from NCERT Exercise 13 (p. 53). Practice (UPSC-pattern, not past papers): questions 5-10.

1. After the transaction between Salim and Prem (a payment by cheque from Salim to Prem):
(i) Salim's balance in his bank account increases, and Prem's balance increases.
(ii) Salim's balance in his bank account decreases and Prem's balance increases.
(iii) Salim's balance in his bank account increases and Prem's balance decreases.

Answer: (ii). The cheque moves money from the payer's account to the payee's.

2. Arun is one of the few people in Sonpur to take a bank loan because:
(a) other people in the village prefer to borrow from the moneylenders.
(b) banks demand collateral which everyone cannot provide.
(c) interest rate on bank loans is same as the interest rate charged by the traders.

Answer: (b).

3. In a SHG most of the decisions regarding savings and loan activities are taken by:
(a) Bank.
(b) Members.
(c) Non-government organisation.

Answer: (b).

4. Formal sources of credit does not include:
(a) Banks.
(b) Cooperatives.
(c) Employers.

Answer: (c). Employers, like Rama's landowner, are informal lenders.

5. With reference to NCERT's graph "Sources of Credit in Rural India, 2019", consider the following statements:
1. Formal sources supplied about two-thirds of rural credit.
2. Moneylenders were the largest single source of rural credit.
3. Commercial banks supplied more than half of rural credit.
Which of the statements given above are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer: (c). Commercial banks gave 51% and moneylenders 23%.

6. Consider the following statements:
1. In June 2025 the RBI decided to cut the cash reserve ratio to 3.0 per cent in four tranches.
2. The cash reserve ratio is calculated on a bank's net demand and time liabilities.
3. The cash reserve ratio is calculated on a bank's total loans.
Which of the statements given above are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer: (a). The CRR is a share of net demand and time liabilities.

7. With reference to the Unified Payments Interface (UPI), consider the following statements:
1. It was launched on 11 April 2016.
2. It was launched by the National Payments Corporation of India.
3. Over 700 banks were live on UPI in March 2026.
Which of the statements given above are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer: (d). 703 banks were live as on March 2026 (PIB, 30 April 2026).

8. As described in NCERT, which of the following are features of a self-help group?
1. A typical group has 15-20 members.
2. A bank loan is sanctioned in the name of the group.
3. Each member must offer collateral for a bank loan.
Select the correct answer using the code given below.
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer: (a). Group responsibility for repayment replaces collateral.

9. With reference to PM SVANidhi, consider the following statements:
1. It gives working capital loans to street vendors in three tranches of ₹15,000, ₹25,000 and ₹50,000.
2. It has been extended until March 2030.
3. Its loans require collateral.
Which of the statements given above are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer: (a). The loans are collateral-free (PIB backgrounder, 30 May 2026).

10. "Cheap and affordable credit is crucial for the country's development." Discuss why the poor still depend on informal lenders, and how self-help groups and recent schemes try to change this. (250 words)

NCERT fill-in (p. 45): easy terms of credit mean low interest rate, easy conditions for repayment, less collateral and documentation requirements.

NCERT exercise 12 (fill in the blanks): (i) Majority of the credit needs of the poor households are met from informal sources. (ii) High costs of borrowing increase the debt-burden. (iii) Reserve Bank of India issues currency notes on behalf of the Central Government. (iv) Banks charge a higher interest rate on loans than what they offer on deposits. (v) Collateral is an asset that the borrower owns and uses as a guarantee until the loan is repaid to the lender.

NCERT exercise (descriptive): credit in high-risk situations (Q1); how money solves the double coincidence of wants (Q2); how banks mediate (Q3); the 10 rupee note (Q4); why expand formal credit (Q5); the idea behind SHGs (Q6); why banks refuse some borrowers (Q7); how and why the RBI supervises banks (Q8); credit and development (Q9); Manav's choice between the bank and the moneylender (Q10); small farmers and credit (Q11).

📦 Revision Capsule

Sources

• NCERT, Understanding Economic Development, Textbook in Economics for Class X, ch. 3 "Money and Credit", Reprint 2026-27 — ncert.nic.in PDF.
• NCERT, Understanding Economic Development, ch. 3, 2020-21 edition (file jess203.pdf in the whole-book zip), as archived on 9 October 2021 — Wayback Machine.
• Press Information Bureau, Ministry of Finance, UPI completes ten years, 30 April 2026 — PIB 2257087.
• Ministry of Finance, Economic Survey 2025-26, ch. 3 (para 3.49) — indiabudget.gov.in PDF; ch. 6 (Kisan Credit Card) — indiabudget.gov.in PDF; ch. 13 (Table XIII.1, DAY-NRLM) — indiabudget.gov.in PDF.
• Department of Financial Services, Pradhan Mantri Jan Dhan Yojana portal, read 6 October 2026 — pmjdy.gov.in.
• Press Information Bureau, backgrounder "PM SVANidhi: From Survival to Self-Reliance", 30 May 2026 — PIB 2266920.
• Press Information Bureau, Ministry of Finance, Mudra loan limit raised to ₹20 lakh, 25 October 2024 — PIB 2068019.
• Reserve Bank of India, Governor's Statement, 6 June 2025 (para 17, CRR) — rbi.org.in.
• Reserve Bank of India, current policy rates and reserve ratios (home page, as on 5 October 2026) — rbi.org.in.