NCERT Solutions for Class 10 Social Science History Chapter 3
Social Science Class 10 Economics
Money and Credit 3
Important NCERT Questions Based on new NCERT Books for Session 2022-2023
Questions No: 1
In situations with high risks, credit might create further problems for the borrower. Explain.
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This statement is true “In situations with high risks, credit might create further problems for the borrower”. Sometimes the interest levied on the credit taken by the borrower forces him to borrow more funds and he falls into a debt-trap. If the interest is on loan is not paid back timely, then the borrower is forced to give up his collateral or asset used as the guarantee, to the lender. If a farmer takes a loan for crop production and the crop fails, loan payment becomes impossible. To repay the loan the farmer has no option but to sell a part of his land which makes his situation worse than before. Since farming is associated with high uncertainty, debt trap is common. Thus, the loan proves to be costlier to the borrower as he ends up losing his assets as well.
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(i) High risk situations occur in rural areas because there the main demand for credit is for crop production which involves considerable costs on seeds, fertilisers, pesticides, water, electricity, repair of equipment.
(ii) There is minimum stretch of three to four months between the time when farmers buy these inputs and when they sell the crop.
(iii) Farmers generally take crop loans at the beginning of the season and repay the loan after harvest.
(iv) Repayment of the loan is crucially dependent on the income from farming.
(v) If a crop fails due to shortage of rain or for any other reason, a small farmer has to sell a part of the land to repay the loan.
(vi) Failure of crops create further problems for the borrowers, Credit does not improve his earnings but leave him worse off than before. Credit in high risks situations pushes the borrower into a debt trap, a situation from which recovery is very painful.
In situations with high risks, such as uncertain economic conditions or ventures with unpredictable outcomes, borrowing money (credit) can potentially create additional problems for the borrower:
1. Debt Burden: Borrowers might face difficulties in repaying loans due to higher interest rates or strict repayment terms imposed by lenders. This can lead to a heavier debt burden and financial strain.
2. Financial Stress: Investment in ventures or businesses with uncertain returns can result in inadequate earnings to repay the loan, causing financial stress for the borrower.
3. Default Risk: If the borrower’s investments or business ventures fail, there is a higher chance of defaulting on the loan. This impacts the borrower’s credit score and future borrowing capacity.
4. Collateral Issues: Lenders in high-risk situations may demand substantial collateral. Borrowers lacking sufficient assets to offer as security may face difficulties in obtaining credit or might face unfavorable borrowing conditions.
5. Debt Cycle: To repay existing debts, borrowers might resort to taking additional loans, creating a cycle of debt accumulation and making it challenging to become debt-free.
6. Reduced Access to Credit: Lenders may become more cautious in high-risk scenarios, reducing the availability of credit or increasing borrowing costs. This limits the borrowing options for individuals or businesses in need of funds.
In summary, while credit is a valuable financial tool, in situations with high risks, borrowing can amplify financial challenges and increase the likelihood of financial difficulties or default for the borrower.