What is credit ? Discuss the positive and negative role of credit with example
Answers
Credit is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately, but promises either to repay or return those resources at a later date.
Positive effect
For example, a manufacturer taking credit during festive season in anticipation of increased demand for his product during the festival, to expand his production, to meet his production costs and later that situation has worked in his favour, as it enabled him to increase his output and sales too. In such a situation ,credit plays a positive role.
Negative effect
In another situation for instance, a small farmer who has taken credit for cultivation might face a problem. As crop production involves high costs on inputs life HYV of seeds, fertilizers, pesticides etc. Farmers generally take loans at the beginning of the season and repay after harvest. But the failure of the crop makes loan repayment impossible, which at times compel them to sell part of their land which worsens their situation. Here, credit has a negative impact.