Short Introduction
Credit plays an important role in economic activities. However, when there is uncertainty or high risk, borrowing money can create serious financial problems for borrowers. This question explains how credit may become harmful in risky situations.
Quick Information Box
| Particular | Details |
|---|---|
| Chapter | Money and Credit |
| Class | 10 |
| Subject | Economics |
| Question No. | 1 |
| Topic | Risks of Credit |
| Difficulty Level | Easy |
Concepts Used (Topics Covered)
- Credit and Loans
- Debt Trap
- Risk in Borrowing
- Crop Failure
- Loan Repayment
- Informal Credit Sources
Important Formulas
No mathematical formula is involved in this question.
Important Concept:
Debt Trap = Inability to repay loan + Accumulating interest + Need for additional borrowing
Question 1
In situations with high risks, credit might create further problems for the borrower. Explain.
Step-by-Step Solution with Explanation
Step 1: Understand High-Risk Situations
A high-risk situation is one where income or returns are uncertain. Examples include:
- Farming affected by droughts, floods, or pests.
- Small businesses facing market losses.
- Jobs with uncertain income.
Step 2: Understand the Role of Credit
People borrow money expecting future income to repay the loan.
For example:
- A farmer takes a loan to buy seeds and fertilizers.
- A shopkeeper borrows money to expand business.
Step 3: What Happens if Things Go Wrong?
If the expected income is not generated:
- The borrower cannot repay the loan.
- Interest continues to increase.
- The debt burden becomes larger.
Step 4: Example from the Chapter
Swapna borrowed money for cultivation.
- Pest attacks destroyed her crop.
- She could not earn enough income.
- She failed to repay the loan.
- Debt increased year after year.
- Finally, she had to sell part of her land.
Final Answer
In high-risk situations, credit can create further problems because repayment depends on future income. If income is not generated due to crop failure, business loss, illness, or any unexpected event, the borrower cannot repay the loan. Interest keeps increasing, leading to a debt burden and sometimes a debt trap. As seen in the case of Swapna, failure to repay the loan forced her to sell a part of her land. Therefore, credit can worsen the financial condition of the borrower in risky situations.
Common Mistakes
❌ Writing only that “loan becomes difficult to repay.”
❌ Not explaining how debt increases over time.
❌ Forgetting to mention the debt trap concept.
❌ Not using a suitable example.
Exam Tips
✅ Mention the term Debt Trap.
✅ Use the example of Swapna from the chapter.
✅ Explain the connection between risk, income loss, and repayment failure.
✅ Write the answer in logical steps for better marks.
Practice MCQs
1. What is the major risk faced by farmers after taking crop loans?
A. Higher production
B. Better income
C. Crop failure
D. Increased savings
Answer: C. Crop failure
2. When a borrower is unable to repay a loan and debt keeps increasing, it is called:
A. Investment
B. Profit Cycle
C. Debt Trap
D. Capital Formation
Answer: C. Debt Trap
3. Credit becomes harmful when:
A. Income increases
B. Risks are low
C. Repayment is easy
D. Income generation fails
Answer: D. Income generation fails
FAQ Section
Q1. What is a debt trap?
A debt trap is a situation where a borrower cannot repay a loan and has to borrow again, causing debt to increase continuously.
Q2. Why did Swapna fall into a debt trap?
Swapna’s crop failed due to pests, so she could not repay her loan and her debt kept increasing.
Q3. Is credit always harmful?
No. Credit is useful when it helps generate income and can be repaid on time.
Q4. What makes a credit situation risky?
Uncertain income, crop failure, business losses, natural disasters, and unemployment make credit risky.
CTA (Call To Action)
Looking for complete NCERT Solutions, MCQs, Chapter Notes, Previous Year Questions, and Exam Preparation Resources?
Visit www.mymockmate.com and boost your exam preparation with high-quality study materials, solved exercises, practice tests, and expert guidance designed for CBSE students.
