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Tuesday, 14 August 2012

Describe the various kinds or types of credit






MEANING OF CREDIT :-
When there are obligations to make payments at some future date the person to whom the future payment is to be made the obligation is called credit.

Following are the different kinds of credit :

CREDIT ON THE BASIS OF USE :

1. Investment Credit :-
The investment credit is used for fixed capital and for capital goods. The borrower can purchase the machinery, factory, equipments and can use it for the transaction facilities. Commercial banks, Insurance companies and finance corporations provide this credit.

2. Commercial Credit :-
It is extended for short period and it used as a working capital. Commercial loans are easy to repay because the firms can easily recover the cash through the sale of their production. Commercial credits are chiefly in the form of bills of exchange and promissory notes. The Commercial credit is mainly extended by the commercial banks and finance houses.

3. Consumption Credit :-
Consumption credit is extended for non business purposes. A consumer spends it on consumption goods like car, T.V., DVD. Consumption loans are issued by the commercial  banks, saving banks, small shopkeeper and money lenders.

4. Speculative Credit :-
Credit is also utilized for speculative purposes. The speculator may borrow from commercial banks or from brokers to earn profit on account of changes in their prices.


CREDIT ACCORDING TO MATURITY :
According to maturity it has following kinds :

1. Long Term Credit :-
From 3 to 5 years period is considered the long term credit. Long term credit is required for capital, such as building and machinery.

2. Intermediate Credit :-
Intermediate credit is normally issued for one to three years. It used for the purchase of machinery, furniture etc. by the firms.

3. Short Term Credit :-
The period of short term credit is ordinary less than one year. This credit is used for the purchase of raw material and to make the payment of labour, advertisement, light and power etc.

4. Demand Credit :-
It is payable on demand. The firm can not use it for fixed assets. Demand credit is generally used by the commercial bank to finance the brokers.


CREDIT ACCORDING TO THE STATUS OF THE DEBTOR :

1. Public Credit :-
Public credit is issued to the Government bodies and they have an obligation to pay on some future date. It is a case of public credit.

2. Private Credit :-
When non-government bodies acquire goods in the present and promise to pay in future. It is the case of private credit.

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