In a barter system where goods are directly exchanged without the use of money, double coincidence of wants is an essential feature. In contrast, in an economy where money is in use, money by providing the crucial intermediate step eliminates the need for double coincidence of wants.
Since money acts as an intermediate in the exchange process, it is called a medium of exchange. Modern forms of money include currency (paper notes and coins), and deposits with banks.
Banks use the major portion of the deposits to extend loans. The difference between what is charged from borrowers and what is paid to depositors is their main source of income.
Collateral is an asset that the borrower owns (such as land, building, vehicle, live stocks, deposits with banks) and uses this as a guarantee to a lender until the loan is repaid. Interest rate, collateral and documentation requirement, and the mode of repayment together comprise what is called the terms of credit.
The various types of loans can be grouped as formal sector loans and informal sector loans. The Reserve Bank of India supervises the functioning of formal sources of loans.