Money and Credit — Part 2: Terms of Credit, Sources and Self-Help Groups: visual lesson, CBSE Class 10 Social Science

Lesson

Who lends, on what terms?

Part 2 — terms of credit, formal and informal lenders, the RBI, and self-help groups.

In this lesson you will

Explain the terms of credit: interest, collateral, documentation and mode of repayment
Compare formal and informal sources of credit and explain the RBI's role
Explain why formal credit must reach the poor
Explain how self-help groups give rural women access to credit and empowerment

Part 2 at a glance

Concept

Table of the four terms of credit with meanings and examples: interest rate, collateral, documentation and mode of repayment
Term of credit	Meaning	Example (imagined)
Interest rate	Extra paid on top of the loan, as a percentage	12% a year on a bank loan
Collateral	Asset pledged as a guarantee until repayment	Land papers, a tractor, gold
Documentation	Papers the lender asks for	Identity proof, land record, income record
Mode of repayment	How and when the loan is repaid	Monthly instalments; lump sum after harvest

Worked example

Kamal (imagined) needs ₹20,000 for 6 months. A moneylender offers 2% a month; a bank offers 12% a year. Which is cheaper, and by how much?

The bank costs half as much, but asks for security and papers.
	Moneylender (imagined)	Bank (imagined)
Loan	₹20,000 for 6 months	₹20,000 for 6 months
Interest	2% a month	12% a year (1% a month)
Interest for 6 months	20,000 × 2% × 6 = ₹2,400	20,000 × 1% × 6 = ₹1,200
Collateral and papers	None	Land record or other security; documents