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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.
2- Availability of Working Capital: Shortage of funds can badly affect the
workings and routine operations of any industrialist. He can meet the
needs of funds by having credit facility from any bank or financial
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 from general public. Funds are borrowed from general public
against issuance of bonds or debentures. These funds are refunded with
interest at some future date. During the period of credit organizations
can easily arrange the payments of interest and also the principal
amount.
4- Case of New Enterprises: Threats of failure are preventing many
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 unit costs are reduced. Quality of products is also increased by
operating at large scale. Large scale production requires accumulation of
large amounts of capital which is met by obtaining credit.
6- Use of Funds for Productive Purposes: Banks and financial
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.
7- Increased Transactions: Credit is not available just to businessmen
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 increased the number of transactions and also the volume of
Golden Education Academy, Civil Quarters Road, Jinnah Park Near Punjab Broast, Sheikhupura.
Contact: 0334-6988867, 0321-7990028, 0301-4817282
51689619.doc
Golden Education Academy, Civil Quarters Road, Jinnah Park Near Punjab Broast, Sheikhupura.
Contact: 0334-6988867, 0321-7990028, 0301-4817282