Question

Explain the advantage and disadvantages of credit to the borrower, the lender and the entire economy of a country

Answer 1

Answer:

Explain the advantage and disadvantages of credit to the borrower.

Advantages:

• Once borrower is in receipt of funds he/she can meet current needs which are need to be full filled. Because of lack of funds a borrower may face serious issues like business loss, failure to meet urgent expenses etc. But the funds obtained via credit route may give borrower an opportunity to meet business needs and to bring it on track in future.
• Borrower if in business of purchasing and selling of goods, then with extra funds he can purchase extra goods and may find way to expand his/her business. Hence credit availability may give borrower an opportunity to expand his/her business.
• Also, if credit is available to eligible candidates then they may start their own start up due to which employment generation can be expected.
• If the given credit is used or managed wisely by the borrowers then they also can think of adding new business segments in their current business domain with the help of extra funds available with them.

Disadvantages:

• If credit availability gives above mentioned advantages to the borrowers if it is not used or managed wisely this can prove expensive as well.
• Due to credit one has to pay meet re-payment obligations to lender along with interest as per terms and conditions of credit.
• If there is default in re-payment by the borrowers then there is also a risk of penalty which needs to be paid by the borrower.
• Many a times a borrower needs to meet certain conditions to obtain credit and if he/she fails to meet such conditions then they may not get credit facility.
• In the event of default by borrower credit rating agencies may down-grade such borrower which may impact borrower’s goodwill in market.

Explain the advantage and disadvantages of credit to the lender:

Advantages:

• Lenders may get an opportunity of receive a source of income via interest earned on credit given to borrower.
• If a lender gives easy payment plans to a borrower then a lender can expect increased number of borrowers due to positive publicity of such easy payment plan and may get an opportunity to earn more income by way of interest.
• A lender may also get an advantage of credit given to borrower when inflation increases. Because of similar goods / services may cost high due to higher rates in market then a lender may earn more income by lending more amount and receiving interest on increased cost of products.

Disdvantages:

• A lender may also have disadvantages of credit given to a borrower. If borrower fails to repay loan in time then a lender would face a default risk. A lender may not be able to recover total amount of credit given to a borrower.
• A lender may also face a risk of delay in repayment of credit by a borrower. If borrower, due to unavoidable circumstances, fail to comply with terms of credit and delays repayment of credit funds.
• A lender may face risk of an opportunity loss if he/she fails to recover the funds from a borrower. Because a lender could have invested that amount in another instrument and may have earned income from another investment as well.
• A lender may lose his/her funds given on credit and face a problem of insufficient balance issue which may result in bad shape of his/her business.

Explain the advantage and disadvantages of credit to the entire economy of a country

Advantages:

• Credit is most important part of the economy of the country. It may lead to circulation of more funds in the economy.
• An increased flow of funds in the economy may lead to increase in spending and due to this we may see increase in income level in the economy.
• Such positive conditions in the economy of the country may lead to increase in the country’s GDP.
• If a credit is used to purchase resources which mat help in higher productions levels in the country then it will lead to faster productivity growth in the economy.
• If credit grows then the banks operating in the country may have benefit of good shape of their loan book because they can enjoy increase in income by way of interest on credit.

Disadvantages:

• If credit is not managed effectively and efficiently by the country it may lead to failure of increased growth prospect of the country.
• Failure to manage credit effectively may lead to increase in interest burden on the country. If the given credit is not used to increase it’s current economic status then economy may not be able to produce more goods / services due to which the country economy may suffer lack of economic growth.
• Such failure of credit management by the country may lead to default risk by the borrower country. If borrower country is not able to repay credit as per pre-decided terms of credit to the lender then it may face risk of loss of reputation in the world.
• In future the borrower country may not be able to obtain credit due it’s bad credit reputation. This will impact development of the country and survival of citizens in that country.