What is credit? How can credit be both an asset as well as a debt trap?

Credits refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payment.

1. Credit as an asset: During the festival season, a shoe manufacturer Salim has received an order of making shoes in bulk, within a month’s time. To complete production, he hired extra workers and has to purchase the raw materials. He asks the supplier to supply leather now and, promise to pay him later. Then he took some advance payment from the trader. By the end, of the month, he is able to deliver the order, make a good profit and repay the money he had borrowed.
2. Credit as debt trap: A farmer Swapna picks up loan from a moneylender to meet the expenses of cultivation. But unfortunately the crop is hit by the pests and fails. So, she is unable to repay the loan and debt grows larger with interest.

In Salim’s case credit plays a vital and positive role, whereas in Swapna’s case credit pushes the borrowers into a situation from which recovery is painful.

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