(a)OR(b)

How does credit play a positive and a negative role? Explain with examples.

Credit plays two roles-positive and negative

A. Positive role of credit:

(i) A large number of transactions in day to day activities involve credit.

(ii) The credit helps to meet the ongoing expenses of production

(iii) Credit plays a positive role when the borrower is able to return the loan amount on time and also makes some profit with the use of that money.

(iv) It makes a person better off than before

(vi)Any example could be given explaining the positive role of credit ($\displaystyle 1$ ½ ) (Example of book: Salim, a shoe manufacturer took a loan from different sources to complete the order of $\displaystyle 3000$ pair of shoes, in the end he delivered the order, made profit and repaid the loan.($\displaystyle 1$+$\displaystyle 1$ ½ =$\displaystyle 2$ ½ ) B- Negative role of credit:

(i) Sometimes failure of the crop makes loan repayment impossible.

(ii) Sometimes credit is very painful as it pushes the borrower into such a situation from which recovery is very difficult.

(iii) In this situation the borrower is not able to repay the loan

(iv) Many times caught into the situation of debt-trap.

(v) To repay loan one has to sell portion of one's land

(vi) Any example could be given explaining the negative role of credit

(viii)Any example could be given explaining the positive role of credit. ($\displaystyle 1$ ½ ) (Example of book-A small farmer Swapna took loan for crop cultivation but due to some reason she faced the situation of crop failure. So she took another loan for spraying pesticides but the production was not enough to repay the loan. So she was caught in debt-trap.($\displaystyle 1$+$\displaystyle 1$ ½ =$\displaystyle 2$ ½ )

(b) What is collateral? Why is it a main reason to prevent the poor getting a loan from banks? Explain. A- Collateral

(i) Collateral is an asset that the borrower owns and uses this as a guarantee to lenders until the loans are repaid. Property such as land, deposits with banks, livestock are some examples of collateral used for borrowing. B- Why is collateral a main reason to prevent the poor getting a loan from banks

(ii) Absence of collateral with the poor.

(iii) Absence of documents with them.

(iv) Absence of formal sources of credit in rural area .

(v) Lack of education and awareness among them.