There are periods when a government is not able to meet its expenditure from
the tax receipts. It then takes recourse to borrowing. The loans which are payable within a year are termed as
short term loans.
Explanation:
(i) If at any time, tile expenditure of the government exceeds its revenue,
then it takes recourse to short term borrowing.
(ii) If, at any time, the rate of interest in the market is very high and the
government is in need of large amounts of money to finance its various projects,
then it raises loan for a short period only and waits till the prevailing high
rate of interest comes down.
(iii) The commercial banks find a very safe and profitable opportunity to
invest their surplus funds in the government short term loans.
Disadvantages/Drawbacks of Short Term Loans:
(i) If a short term loan is taken at
a lower rate of interest for paying off a debt raised at a higher rate, then it
won't produce any unhealthy repercussions. But if the short term debt is
contracted for ah unnecessary expenditure, then people lose faith in the
financial stability of the country.
(ii) The commercial banks find treasury bills as the most safest and profitable
form of investment, they divert their resources from trade and industry and
invest their funds in treasury bills. The economic progress of the country is
thus badly affected.
(iii) When a government is in debt, it becomes very difficult for her to get out
of it. As one temporary loan matures, the government being unable to pay it
issues another loan to pay off the first and this process continues for an
indefinite period.
(iv) Another drawback of this lean is that if at any time some emergency
arises, then new loans in large amounts cannot be easily raised because the
government is already under debt.
