The Need for Credit in the Economy and its Essence

Credit has always been defined in the economic literature as the movement of loan capital, the use of funds from one enterprise to another, subject to their return to the first, as a debt of one entity to another.

The reason for the emergence of credit in the economy in a broad sense is associated with commodity-money relations. In addition, there are specific reasons for credit relations: the need to ensure the continuity of the reproduction process, the continuity of the circulation of funds in organizations of different forms of ownership. Credit arises not at the stage of production of material values, but in the process of exchange, distribution of funds. Credit, like finance, is a distributive economic category.

In the course of the circulation of fixed and circulating capital, on the one hand, it is released in cash, on the other hand, there is a temporary need for additional funds for production and social needs. Credit is used to resolve this contradiction. consequently, the economic basis, the condition for the emergence is the movement of capital of organizations of different forms of ownership and fields of activity

For a deeper understanding of the reasons for the existence of credit relations, it is necessary to find out how temporarily free cash is formed in the economy, what is their source and how there is a temporary need for funds from organizations and individuals.

The funds of organizations in the process of movement alternately take the form of cash, inventories, work in progress, finished products, goods shipped, and again - their original, i.e. monetary form. As a result of the transformation of the commodity form of funds into monetary organizations, they receive income, which is used and distributed, as a rule, gradually.

Part of the income received is intended to pay off obligations to the budget and extra-budgetary funds. Payments are transferred to the budget within a specific, established period, so for some time these sources act as free resources of organizations.

Another part of the income is directed to the formation of target funds. The creation of these funds and their use, for example, for wages, social development, too, do not coincide in time. This is how funds are released from the circulation of organizations, i.e. formation of temporarily free cash resources. Not only the funds of enterprises of various sectors of the economy and various forms of ownership can act as free funds, but also the money of the population in the form of savings, state resources, own funds and reserves of banks and credit institutions, balances in the accounts of budgetary organizations.

All these are elements of loan capital, or sources of crediting the economy. In addition, the newly created funds in the form of money emission serve as a source of lending. In this case, the anticipatory nature of the loan is manifested, i.e. its ability to outstrip the formation of free funds, savings in monetary and commodity forms.

Simultaneously with the creation of free resources in the course of capital circulation, a temporary need for funds arises. It can be called:
- seasonality of production and sale of products. This is typical primarily for agricultural enterprises and organizations involved in the processing of raw materials in this industry (food, light industry). Such enterprises and organizations receive raw materials from suppliers irregularly and unevenly throughout the year. For the formation of large reserves of a seasonal nature, own funds are not enough, therefore, there is a need for borrowed sources, including a bank loan;

- mismatch in time of receipt of income from sales, non-sales activities and payment of settlement documents of suppliers, incurring other costs;

- the need for the supplier to assign to the bank monetary claims against the payer. This may be due to the fact that the supplier is experiencing temporary financial difficulties and is not able to wait for the due date of payment, for example, on a bill of exchange.

Not only legal entities, but also individuals need a loan. Individual borrowers apply to the bank for a loan when their own savings are insufficient for construction, purchase of housing, durable goods, payment for treatment, and education.

The state may also need to attract temporarily free funds if there is insufficient revenue to the budget to finance the economy, the socio-cultural sphere. To this end, to cover the budget deficit, the state issues debt obligations, which are placed among various legal entities and individuals.

To satisfy the need for a loan, certain economic and legal conditions for credit relations must develop.

1. The use of borrowed funds in the turnover of an economic entity gives rise to liability for the safety of these funds and their timely return. This means that the participants in the credit transaction must be the owners of the property they have or have the rights to own and use it (this applies to state-owned enterprises). This condition is necessary, since the property of the borrowing enterprise acts as a kind of collateral for the loan, a secondary source of debt repayment on the loan.

2. Simultaneous coincidence of interests of the lender and the borrower The lender must have available funds, and the borrower needs them. Of great importance for the lender is the reliability of the borrower, his creditworthiness and reputation.