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51689619.doc
Q- 4. Explain different advantages and Disadvantages of Credit. Ans: Credit is the base of banking systems and is one of the most effective tools of frequent and healthy economic activities. Credit is providing a lot of benefits to economies. Though dangers are also there but it is benefitting the economies as: Advantages of Credit: 1- Economy in the Use of Metal: Credit transactions and system of credit in the country has reduced the use of metal for issuance of money. Metal is used for making coins or is kept as reserves against the issued notes. Credit money created by banks does not involve use of metal. Availability of Working Capital: Shortage of funds can badly affect the 2- Availability workings and routine operations of any industrialist. He can meet the need needs s of fund funds s by havin having g cred credit it faci facili lity ty from from any any bank bank or finan financi cial al institution. He need not to sale fixed assets for making payments for raw material, salaries or other routine expenses. 3- Issue of Debentures: It is a tool of obtaining funds from general public. When funds are required by firms, funds can be borrowed from any bank or even even from from gener general al public public.. Funds Funds are borrow borrowed ed from from genera generall public public against issuance of bonds or debentures. These funds are refunded with interest at some future date. During the period of credit organizations can can easi easily ly arra arrang nge e the the paym paymen ents ts of inte intere rest st and also also the the prin princi cipa pall amount. Case of New New Enterp Enterpris rises: es: Threa Threats ts of failur failure e are preven preventin ting g many many 4- Case investors from taking bold steps in early days of their businesses. It can also be said that people behave in more conservative way in starting days. Credit facilitates these young firms to develop resources at a rapid speed. 5- Large Scale Production: Large capital makes it possible to enjoy the economy of large scale. To accumulate capital funds are borrowed from individuals and institutions. When operations are carried on large scale per per unit unit cost costs s are are redu reduce ced. d. Qual Qualit ity y of prod produc ucts ts is also also incr increa ease sed d by operating at large scale. Large scale production requires accumulation of large amounts of capital which is met by obtaining credit. Use e of Fund Funds s fo for r Prod Produc ucti tive ve Purp Purpos oses es:: Bank Banks s and and fina financ ncia iall 6- Us institutions are converting idle funds kept in the form of savings into capital. Banks are getting savings of people in form of deposits and are creating loans and are advancing loans to businessmen who are in needs of funds. Credit system makes it possible to shift idle funds to more productive hands. Transactions: Credit is not available just to businessmen 7- Increased Transactions: even it is provided for consumption purposes. Banks are providing loans for the purchase of consumer goods like vehicles, refrigerator, washing machines, air conditioners etc. This credit facility for consumption goods has has incr increa ease sed d the the numb number er of tran transa sact ctio ions ns and and also also the the volu volume me of Golden Education Academy, Civil Quarters Road, Jinnah Park Near Punjab Broast, Sheikhupura. Contact: 0334-6988867, 0321-7990028, 0301-4817282
51689619.doc
business of manufacturers of such goods. Such development might have not possible at this pace without credit. 8- International Payments: Payments are deferred for imports and exports and bills of exchange and other credit instruments are used for making payments and international level. Now there is no need to accumulate gold or other metallic reserves for making international payments. 9- Availability of Funds to Governments: Governments in developing countries like Pakistan are greatly facilitated by credit system. As in the days of needs funds are borrowed from both local and foreign sources. Disadvantages or Dangers Associated with Credit: A rosy picture of credit facility and credit system has been portrayed above. No doubt credit system is a great facility to everyone and is the major cause of revolutions in business world. But it is also clear that it has dangerous potentialities. If it is not used with care and attentiveness then it can cause dangers which are as under: 1- Over Issue of Credit: Over issuance of credit is one of the big disadvantages of credit facility. General Price level is closely related to the quantity of money in any economy. If money is issued in excess by banks then prices will go up and purchasing power of people will suffer a lot. 2- Bad Debts: In the countries where monetary systems are influenced by politicians, bad debt losses have created hurdles in the development of economy, individual business concerns and banks. People get loans and then theses loans are never refunded. Capital and funds which 3- Inefficient Business Concerns: It is also observed that facility which is provided to new entrants in the business world by credit system has brought some inefficient concerns into existence. Such inefficient business concerns create problems for all the persons and institution when they go into liquidation. Liquidation affects each and every person dealing with that concern. 4- Monopolistic Exploitation: Due to availability of capital to some concerns only, it might happen that such concerns may become able to develop powers to control the whole market and enjoy monopoly. In the absence of capital it is relatively difficult to accumulate the large capital to get undue advantage of sole supply or manufacture. 5- Borrowing by Governments: It has become a practice of governments in many developing countries to obtain short and long term loans to meet the financing requirements. Instead of generating funds from other effective operations governments are using credit as a resort in the days of need. Interest and principal payments are causing problems for developing countries as a consequence of credits.
Golden Education Academy, Civil Quarters Road, Jinnah Park Near Punjab Broast, Sheikhupura. Contact: 0334-6988867, 0321-7990028, 0301-4817282
