Definition
Credit is the trust factor in which one party provides money to another party, where the second party must repay the first party back. Like loans of a bank.
Debt-trap
Many of the borrowers use credit for investing in their business, or farming.
- Now, if the interest rate is too high, then the borrower spends his profit in repaying, thus there is no profit nor economic growth.
- In a brighter side, if the interest rate is low, and the business / farm flourishes, then there is profit and economic growth. (Credit can be good)
- But if the farm or business doesn’t even flourish, then the borrower will need to get another loan to repay the previous loan, and thus, fall into a debt-trap. (Credit can be bad) In a nutshell, when someone borrows credit in a high risk, and is unable to pay it back. He/she takes another loan to repay it and the cycle continues. This is called debt-trap.
Formal and Informal Sources
Formal sources use proper documents, are govt. regulated (eg. Bank Loans, Self Help Groups). But the informal sources are not regulated, thus they can use any means, especially malpractices. To the contrary, informal sources are more popular due to their abundance and easy availability. To counter this, banks should opt to give loans to much wider audiences and rural areas.
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Flashcards
What is credit? ? Credit is the trust factor in which one party provides money to another party, where the second party must repay the first party back. Like loans of a bank.
What is debt-trap? ? When someone borrows credit in a high risk, and is unable to pay it back. He/she takes another loan to repay it and the cycle continues. This is called debt-trap.
How can credit produce good results? ? If the interest rate is low, and the business / farm flourishes, then there is profit and economic growth. (Credit can be good)
Formal Sources of credit vs Informal? ? Formal sources use proper documents, are govt. regulated. E.g banks, SFGs But the informal sources are not regulated, thus they can use any means, especially malpractices. Eg. friends, relatives, employer, etc.
Why is informal sector more popular and how to counter that? ? Informal sources are more popular due to their abundance and easy availability. To counter this, banks should opt to give loans to much wider audiences and rural areas.