Professional Courses
Industry-relevant training in Business, Technology, and Design to help professionals and graduates upskill for real-world careers.
Categories
Interactive Games
Fun, engaging games to boost memory, math fluency, typing speed, and English skillsβperfect for learners of all ages.
Typing
Memory
Math
English Adventures
Knowledge
Enroll to start learning
Youβve not yet enrolled in this course. Please enroll for free to listen to audio lessons, classroom podcasts and take practice test.
Interactive Audio Lesson
Listen to a student-teacher conversation explaining the topic in a relatable way.
Understanding Credit
Unlock Audio Lesson
Signup and Enroll to the course for listening the Audio Lesson
Today, we're going to talk about credit. Can anyone tell me what credit means?
Isn't it about borrowing money?
Exactly! Credit is an agreement where the lender gives money, goods, or services to the borrower with a promise of future payment. Why do we think people use credit?
To buy things they can't afford right now?
Right! And accessing this credit can be through formal or informal sources. Let's focus on two types of credit today: formal credit provided by banks and informal credit from places like moneylenders.
Formal vs Informal Credit
Unlock Audio Lesson
Signup and Enroll to the course for listening the Audio Lesson
What are some differences between formal and informal credit?
Formal credit needs collateral and documents.
But informal credit doesnβt need that, right?
Correct! Although informal credit is easier to access, it often comes with much higher interest rates. This can lead to debt traps. What do we understand by a debt trap?
Itβs when someone gets stuck in debt and can't pay it back.
Exactly! That's why understanding the differences is crucial for making informed financial decisions.
Self-Help Groups (SHGs)
Unlock Audio Lesson
Signup and Enroll to the course for listening the Audio Lesson
Now, letβs talk about ways to improve access to credit. Have any of you heard of Self-Help Groups (SHGs)?
A bit! They help people, right?
Yes! SHGs bring together people to pool savings and borrow money at reasonable interest rates. Why do you think this is beneficial for poor households?
They might not have collateral but can still get loans!
Absolutely! SHGs also empower members socially and economically, allowing collaboration and shared responsibility. Remember, credit can positively influence development if accessible to all.
The Necessity of Expanding Formal Credit
Unlock Audio Lesson
Signup and Enroll to the course for listening the Audio Lesson
Why is it important to expand formal sources of credit?
So people don't depend on moneylenders?
Exactly! If more people can access loans without heavy interest, they can invest in businesses, education, and housing. What is the role of government in facilitating this?
The government can support banks and encourage lending to small farmers or low-income individuals.
Very good! Your understanding will enable you to better navigate the financial landscape.
Introduction & Overview
Read a summary of the section's main ideas. Choose from Basic, Medium, or Detailed.
Quick Overview
Standard
The difference between formal and informal credit systems is a critical aspect of economic development. This section outlines the characteristics of both systems, the challenges faced by lower-income households in accessing formal credit, and innovative solutions like Self-Help Groups (SHGs) to improve access to credit.
Detailed
Detailed Summary of Formal and Informal Credit
The section on Formal and Informal Credit explores two primary types of credit systems that people can access in daily life. It discusses:
Key Points:
- Definition of Credit: Credit is defined as an agreement in which a lender supplies money, goods, or services to a borrower with a promise of future payment, which can significantly impact economic activity.
- Sources of Credit: Credit can be sourced from formal (banks, cooperatives) or informal sectors (moneylenders, relatives). The majority of rural households still rely on informal sources, which often impose high-interest rates.
- Requirements for Borrowers: Formal credits often require collateral and extensive documentation, making it challenging for the poor to obtain loans. In contrast, informal lenders may not require such terms but typically charge higher rates.
- Impact of Differential Access: The section illustrates the disparity in credit access, highlighting how rich households can more easily secure formal loans while poorer households remain trapped in informal arrangements.
- Self-Help Groups (SHGs): It describes SHGs as a viable solution to provide access to credit, helping low-income individuals, especially women, to save and borrow collectively. SHGs empower individuals with financial independence and allow the pooling of resources for better loan terms.
- Importance of Cheap Credit for Development: Finally, it emphasizes the need for expanding formal credit sources to reduce dependency on costly informal loans, especially among poorer segments of the population.
The section connects the importance of credit arrangements to economic development, urging for more inclusive financial practices.
Youtube Videos
Audio Book
Dive deep into the subject with an immersive audiobook experience.
Understanding Credit
Unlock Audio Book
Signup and Enroll to the course for listening the Audio Book
A large number of transactions in our day-to-day activities involve credit in some form or the other. 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.
Detailed Explanation
Credit is essentially a loan agreement where a lender provides money, products, or services to a borrower, who then promises to repay later. This system allows people to obtain the resources they need without having to pay upfront. It plays a significant role in economic activities, as it enables businesses and individuals to manage their cash flows better.
Examples & Analogies
Imagine you're a student who wants to buy a new laptop for school but doesnβt have enough money right now. You can go to a store, and if they offer credit, you can take the laptop home today and pay for it in installments over the next few months. This arrangement allows you to use the laptop while you pay for it gradually.
Two Different Credit Situations
Unlock Audio Book
Signup and Enroll to the course for listening the Audio Book
In this case, Salim obtains credit to meet the working capital needs of production. The credit helps him to meet the ongoing expenses of production, complete production on time, and thereby increase his earnings. Credit therefore plays a vital and positive role in this situation.
Swapna, a small farmer, grows groundnut on her three acres of land. She takes a loan from the moneylender to meet the expenses of cultivation, hoping that her harvest would help repay the loan. Midway through the season, the crop is hit by pests and the crop fails. Though Swapna sprays her crops with expensive pesticides, it makes little difference. She is unable to repay the moneylender and the debt grows over the year into a large amount.
Detailed Explanation
The section presents two contrasting scenarios involving credit. Salim, a shoe manufacturer, benefits from credit as it allows him to manage his production expenses efficiently. In contrast, Swapna, a small farmer, finds herself in a debt trap after taking a loan for her crop cultivation. Her misfortune with crop failure leaves her unable to repay the loan, leading to increasing debt. This contrast underscores that while credit can promote economic growth in some cases, it can also have debilitating effects when risks are not managed.
Examples & Analogies
Consider Salim as a small business owner who takes a loan to buy inventory. He sells his products and makes a profit, allowing him to pay off the loan easily. On the other hand, think of Swapna as someone who invests in a business without a solid plan, only to find that it fails due to factors beyond her control. Now she has to work harder to pay back her debts, highlighting that without careful planning, credit can sometimes lead to greater financial difficulties.
Terms of Credit
Unlock Audio Book
Signup and Enroll to the course for listening the Audio Book
Every loan agreement specifies an interest rate which the borrower must pay to the lender along with the repayment of the principal. In addition, lenders may demand collateral (security) against loans. Collateral is an asset that the borrower owns (such as land, building, vehicle, livestock, deposits with banks) and uses this as a guarantee to a lender until the loan is repaid.
Detailed Explanation
The terms of credit define the conditions under which a loan is granted. This includes the interest rate, which is the cost of borrowing the money, and collateral, which is property the borrower must provide as security. If the borrower fails to repay the loan, the lender has the right to seize the collateral. Understanding these terms is crucial because they determine the affordability and accessibility of credit for borrowers.
Examples & Analogies
Imagine you want to borrow $1,000 from a bank. They may say, 'We will lend you this money, but at an interest rate of 5% per year, and we need your car as collateral.' If you repay the loan on time, you keep your car, but if you don't, the bank can take it. This example highlights how credit works and the importance of understanding the costs involved.
The Need for Formal Credit
Unlock Audio Book
Signup and Enroll to the course for listening the Audio Book
Compared to the formal lenders, most of the informal lenders charge a much higher interest on loans. Thus, the cost to the borrower of informal loans is much higher. Higher cost of borrowing means a larger part of the earnings of the borrowers is used to repay the loan.
Detailed Explanation
Formal credit sources, such as banks, typically offer loans at lower interest rates compared to informal sources like moneylenders. High-interest rates from informal lenders can lead borrowers to allocate too much of their income towards repayment. This financial strain can limit their ability to save or invest in other opportunities, creating a cycle of debt.
Examples & Analogies
Think of a person who has to pay high interest on a loan from a local moneylender versus another who borrows from a bank that offers low interest. If the moneylender charges 20% interest annually, most of the income will go to servicing the loan. In contrast, if the bank charges only 5%, the individual can save or invest more money. This difference can impact their financial stability and long-term planning.
Definitions & Key Concepts
Learn essential terms and foundational ideas that form the basis of the topic.
Key Concepts
-
Formal Credit: Credit provided by banks and financial institutions, requiring documentation and often collateral.
-
Informal Credit: Credit from non-institutional sources with less stringent requirements but characterized by higher interest rates.
-
Debt Trap: A perilous cycle of borrowing and repayment that can lead to severe financial distress.
-
Self-Help Groups (SHGs): Collective groups that enable members to save and borrow, improving access to affordable credit.
Examples & Real-Life Applications
See how the concepts apply in real-world scenarios to understand their practical implications.
Examples
-
In rural areas, a farmer might take a loan from a moneylender to buy seeds, but this often comes with a high-interest rate, leading to a debt trap.
-
Self-Help Groups enable women to save a little each week and borrow against their savings, providing a more sustainable way to finance their needs.
Memory Aids
Use mnemonics, acronyms, or visual cues to help remember key information more easily.
π΅ Rhymes Time
-
When you seek a loan, don't be late, choose formal credit, don't tempt fate!
π Fascinating Stories
-
Once in a village, a farmer named Raju got a loan from a moneylender. His high-interest debts piled up, but when his sister joined an SHG, he learned to save and borrow wisely, escaping his cycle of debt!
π§ Other Memory Gems
-
Remember 'FIVE' for formal credit: 'F' for Financial institutions, 'I' for Interest rates, 'V' for Verification, and 'E' for Eligibility.
π― Super Acronyms
SHG
- Save
- Help
- Grow.
Flash Cards
Review key concepts with flashcards.
Glossary of Terms
Review the Definitions for terms.
-
Term: Credit
Definition:
An agreement where a lender provides money, goods, or services to a borrower, based on a promise to repay later.
-
Term: Formal Credit
Definition:
Credit sourced from recognized financial institutions, typically involving collateral and formal documentation.
-
Term: Informal Credit
Definition:
Credit sourced from non-institutional entities (like moneylenders) usually without strict paperwork but at higher interest rates.
-
Term: Debt Trap
Definition:
A situation where a borrower is unable to repay loans, leading to taking more loans to cover old debts, effectively deepening their financial crisis.
-
Term: SelfHelp Group (SHG)
Definition:
A community-based group where individuals pool savings and provide loans to members, aimed at improving financial access and economic empowerment.