Debt is an obligation of a party to pay back the money borrowed from another party. Various companies and individuals use debt to make those large purchases that they otherwise cannot afford. It is essential that the debt is paid back to the lender, usually along with the interest. Public Debt and Private Debt are two such kinds of debt.

What is Public Debt?

Public debt also known as national debt, is defined as a debt that is borrowed by government bodies for the development of the public. The government can borrow debt from national banks such as the Central Bank of India or can also borrow debt from other countries and international banks. The debt taken from foreign banks and governments is known as external debt. In India, the public debt is managed by the Reserve Bank of India. When the government of a country faces a budget deficit, it borrows funds from different sources. Besides the budget deficit, the government also borrows funds for wars, public welfare schemes, infrastructure projects, nuclear programs, etc. In addition to this, the government uses these funds to revive dysfunctional public sector enterprises.

Different types of public debt include Internal debt and external debt, productive debt and unproductive debt, redeemable and irredeemable debt, short and long-term debt, and voluntary and involuntary debt.

What is Private Debt?

Private Debt is defined as the debt or loan provided by private entities such as banks, and private firms, instead of public institutions and government, and is accommodated by an individual, non-government organisation, or by any private business. The basic aim behind private debt is the provision of a source of financing for individuals or companies. Private businesses or individuals can take Private Debt in many forms such as personal loans, business loans, credit loans, and corporate bonds.  As a guarantee and for the purpose of security, credit providers ask for security in the form of any asset. Debt taken from credit providers results in high charges for mispayments, security-related issues, and high interest.

Some of the most common types of private debt include corporate bonds, mezzanine financing, senior secured debt, junior debt, asset-based lending, real estate financing, etc.

Difference between Public Debt and Private Debt