refers to an agreement in which the lender supplies the borrower with money,
goods or services in return for the promise of future payment.
(i) Example of credit as an asset: During the festival season, a shoe
manufacturer has received an order of making shoes in bulk, within a month's
time. To complete production, he hired some extra workers and has to purchase the
raw materials. He asks the supplier to supply leather now and promises to pay
him later. Then he took some advance payment from the trade. By the end of the
month, he is able to deliver the order, make a good profit and repay the money
he had borrowed.
(ii) Example of credit as debt trap: A farmer picks up the
loan from a moneylender to meet the expenses of cultivation. But unfortunately
the crop is hit by the pests and fails. So, he is unable to repay the loan and
debt grows larger with interest. Next year, he picks up a fresh loan and is
able to have a normal crop that year. But earnings are not enough to pay the earlier
debt. So, he is caught in a debt trap. He can repay the loan, only after
selling a part of the land.
In shoemaker's case credit plays a vital and positive
role, whereas in farmer's case credit pushes the borrower into a situation from
which recovery is very painful.
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