Question

What is a dabt trap? why is the recovery from the debt trap painful?

Answer 1

Debt trap is a situation where increasing amount of debt is taken without repaying the earlier debt. Often new debt is taken is just to repay off the old debt. Recovering from such a situation can be very painful as it may push the borrower further in poverty and even in some cases loss of assets. For instance, a suppose a small framer has taken a loan for the purpose of crop production. If in case a crop failure occurs then, he will not be able to repay the debt, instead would have to incur new debt just repay off the old debt. To move out of the situation, the farmer might even have to sell or mortgage his land thereby, pushing him in a painful situation.