Credit Situations – Long Answer Questions
Medium Level (Application & Explanation)
Q1. Using Salim’s case, explain how credit can help a small business grow.
Answer:
- Salim got a big order but lacked cash for raw materials.
- He took a bank loan at a reasonable interest rate.
- He bought leather, thread, and tools on time because of the loan.
- He finished the order and sold the shoes at a profit.
- He repaid the loan with interest and still had surplus income.
- The credit helped him expand production and improve his livelihood.
Q2. How can credit increase farm production? Explain with Sushila’s example.
Answer:
- Sushila is a small farmer who needed money for seeds and fertilizers.
- She took a short-term loan from a cooperative at low interest.
- She bought inputs on time and sowed at the right season.
- Good monsoon led to a higher yield.
- She repaid the loan and kept the profit.
- The credit increased her production and income.
Q3. How do the source of credit and the interest rate shape the result of borrowing?
Answer:
- Source of credit matters a lot. Banks/Cooperatives charge lower interest.
- Moneylenders often charge very high interest, like 5% per month.
- Low interest keeps repayments manageable and supports profit.
- High interest increases burden and can create a debt trap.
- In good times, both can be repaid, but high interest is still risky.
- In bad times, high interest becomes unpayable, and debts grow.
Q4. Why is the purpose of borrowing important? Compare Ajay and Parvati.
Answer:
- Purpose decides if credit helps or hurts.
- Ajay used credit to buy sewing machines and rent a shop.
- This is a productive use. It creates income to repay the loan.
- Parvati borrowed for a wedding, which is non-productive.
- It does not create income and makes repayment hard.
- Productive loans build assets; non-productive loans risk a debt trap.
Q5. State conditions that make credit safe and useful for borrowers.
Answer:
- Take loans from formal sources like banks and cooperatives.
- Choose reasonable interest rates to keep EMIs small.
- Borrow for productive purposes that generate income.
- Borrow the right amount; avoid excess.
- Have a clear repayment plan and some savings for emergencies.
- Understand the risks (like drought, weak sales) and plan for them.
High Complexity (Analysis & Scenario-Based)
Q6. A fruit seller can choose: (A) bank loan at 12% per year, or (B) moneylender at 5% per month. Which is better and why?
Answer:
- Option A is 12% per year.
- Option B is 5% per month, which is about 60% per year (5 × 12).
- On ₹50,000, Option A costs about ₹6,000 interest in a year.
- Option B costs about ₹30,000 interest in a year.
- The bank loan is far cheaper and safer to repay.
- So, choose Option A. It prevents a debt trap and protects income.
Q7. Swapna faced drought and a high-interest loan. What steps should she take next season to avoid a debt trap?
Answer:
- Borrow from a bank or cooperative at low interest.
- Take a smaller loan only for key inputs (seeds, fertilizer).
- Build a repayment plan based on expected yield and price.
- Reduce risk: choose drought-resistant seeds or diversify crops.
- Keep a small emergency fund from family savings or past profits.
- Avoid non-productive spending and review costs closely.
Q8. Ramesh’s sales are weak. He pays 5% per month to a moneylender. Explain how this creates a debt spiral and suggest a fix.
Answer:
- 5% per month is a very high interest rate.
- When sales fall, Ramesh cannot repay on time.
- The interest adds up fast, so the debt keeps growing.
- He may sell assets, but the debt still remains.
- This is a classic debt trap due to high interest and low income.
- Fix: Refinance with a bank/cooperative, reduce costs, increase sales, and follow a strict repayment plan.
Q9. Two people borrow ₹1 lakh each: Ajay for a tailoring shop, Parvati for a wedding. After one year, compare likely outcomes.
Answer:
- Ajay’s loan is productive; it buys machines and increases income.
- He earns daily, pays EMIs, and may still have profit.
- Parvati’s loan is non-productive; it creates no income.
- She finds repayment hard and may borrow again to pay interest.
- Ajay builds an asset and improves livelihood.
- Parvati risks a debt trap and a fall in living standards.
Q10. Ajay wants to expand his tailoring shop with a new loan. Design a simple borrowing plan to ensure benefits.
Answer:
- Choose a formal source (bank/cooperative) with low interest.
- Borrow only the needed amount for machines and rent.
- Estimate monthly income and ensure EMI is less than monthly profit.
- Keep a three-month buffer for slow business days.
- Track costs, increase orders, and avoid waste.
- Repay on time to save interest and build a good credit record.