Credit is neither capital nor its creates capital. The credit instruments only represent money and facilitate the business. The importance of credit can be judged by the following facts :
1. Large Scale Production :-
The less developing countries like India or Pakistan facing capital shortage problem. Our production sources are limited. So credit instruments have provided the money to the industrialists. Now production is on large scale and cost per unit has been reduced. The quality and quantity has been improved.
2. Increases In Saving Rate :-
Credit provides an opportunity to save the money some people save the money but they are not capable to do any business. So they lend it to the financial institutions. Credit makes possible the shifting of money to those people who can use it for productivity.
3. Shifting Of Capital To Productive Purposes :-
There are so many people who have surplus money but they are not capable to do any business. So they lend it to the financial institutions. Credit makes possible the shifting of money to those people who can use it for productivity.
4. Economy In The Use Of Metal :-
Credit instruments are used in place of metallic coins. So there is a saving of precious metals also. Further use of credit instruments is more effective and convenient.
5. Provision Of Working Capital :-
Some times an industrialist faces the finance problem to purchase the raw material or for the payment of wages. So he avails the credit facility.
6. Sale Of Bonds :-
Some time a firm can obtain credit by selling the bonds. If the firm prospects are bright it will repay the principal amount with interest.
7. Case Of Young Firm :-
Credit enables the manager of a young firm to develop its resources at a rapid speed.
8. Emergency Of New Businessman :-
Credit makes possible the entrance of new talent in the business enterprise. If the person has all the qualities of a good entrepreneur but having no capital, credit provides him the chance to utilize his qualities.
9. Purchase Of Goods :-
Credit enables the consumer to purchase the consumption goods like T.V. Radio, Car House etc.
10. International Payments :-
Through the bills of exchange international payments can be made very easily. There is no need to import or export the gold for the international business transactions.
11. Useful For The State :-
If the Govt. Budget is deficit, it can be met by selling the bonds and receiving the credit. Even in case of emergency, war, credit is very beneficial for the state.
DANGERS OF CREDIT :
No doubt credit is just like the blood and life for the trade and industry but it has also some defects. If the credit weapon is not properly regulated and controlled it has serious defects, which are following :1. Over Issue Of Credit :-
The expansion of credit beyond the safe limit usually results in over investment, over production and raising price. While the contraction of credit.
2. Bad Debts :-
If any consumer or nation misuses the credit then the loan will not repaid and it will create panic in the monetary circles.
3. Inefficient Business Concerns :-
Financially weak businessman who is running uneconomic concerns and he is receiving the credit, all the firms which had trade relations with it all suffer. It will also create panic in the business circle.
4. Monopolistic Explosion :-
If a large amount of credit is at the disposal any individual or corporation, then there is a danger of monopolistic exploitation and a monopolist can adopt any unfair method in the business dealings.
5. Borrowing By Govt. :-
If the Govt. spends the borrowed money lavishly the citizen will loose confidence on the creditability of the state.
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