In situations with high risks, credit might create future problems for the borrower. Explain.

Q.1:- In situations with high risks, credit might create future problems for the borrower. Explain.

 

Answer:-

It is true that in situations with high risks, credit might create problems for the borrower, e.g., a small farmer takes a loan to meet the expenses of cultivation, hoping that his harvest would help him to repay the loan. But if his crop fails due to shortage of rain or for any other reason, he will be unable to repay the loan.

In such situations a small farmer has to sell a part of his land to repay the loan. Such cases have high risks because the payment of loan entirely depends on good a crop which in turn depends on good rain. HYV seeds fertilizers, pesticides and other factors. This type of loan pushes the farmer into a debt-trap in the case of crop failure and the position of the farmer becomes worse off than before.