Credit refers to an agreement in which the lender supplies the borrower with credit refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise or 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 had to purchase the raw material. He asked the supplier to supply leather then and promised to pay him later. Then he took some advance payment from the trader. By the end of the month, he was able to deliver the order, make a good profit and repaid 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 the 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. money, goods or services in return for the promise or future payment.
