Explain the positive and negative role of credit in economy?

Dear Student,
Credit plays a crucial role in the development of a particular economy. By sanctioning loans to various industries and trade, banks provide them with the necessary aids for improvement. This leads to increased production, employment and profit of the industries. However, certain amount of precaution has to be exercised in the case of high risks so that losses do not occur. This advantage of loans  are also needed to be manipulated and kept under an administrative hold because loans from the informal sector include high interest rates that may be more harmful than good. For this reason, it is important that the formal sector gives out more loans so that borrowers are not duped by moneylenders, and can ultimately contribute to the development of the economy. 

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  • Positive Role : If credit allows a trader / farmer uses credit to meet the working capital needs for production, the ongoing expenses for production, complete production on time and thereby increases his / her earnings and uses part of the profit to repay the loan, then credit plays a positive role.
  • Negative Role : The repayment of the loan is crucially dependent on the income of one source and when that source fails to repay the loan ( in case of a farmer - crop failure ) then credit pushes the borrower into a situation from which recovery is painful .
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