Explain with two examples, two different credit situations-a positive and a negative.

Credit can lead to situations where the end result can either be positive or negative.

a. Example of a positive credit situation:

Supposing there is an upcoming festival, and for this, person X has received a larger order of commodity A from a trader, and this order has to be delivered in a short period of time. In order to be able to deliver this order on time, person X has to take credit from different sources. This credit isused as working capital for production, such as needing more employees to finish the workon time.By thee nd, person X is able to fulfill the order made by the trader and is able to pay back the loan,and also make aprofit on hisorder. This is a positive credit situation, because person X is better off than he was before.

b. Example of a negative credit situation:

Supposing there is a small farmer who owns a small portion of land on which he/she grows a cash crop. Inorder to meet the expenses of cultivating the land, the farmer takes a loan from a moneylender (informal credit). But, halfway through cultivating season, the crop gets destroyed by pests, and the use of pesticides does not help. So, the crop has no value now, and the farmer can not payback the loan. The next year, the farmer takes another loan. But even though the harvest is normal, the income is not enough to pay back the entire loan, including the original loan that was taken for the failed crop. As a result, the farmer falls into debt, and has to sell off a portion of his/her land inorder to payback the loan. In this situation, the farmer is worse off than he/she was before taking the loan, so it is a negative situation.

Therefore, taking loans is very tricky becomes sometimes it helps the borrower, but sometimes it also leads to a bad situation for the borrower from which recovery is difficult.