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The ongoing shift in the financial markets towards retail loans is leading to an increase in consumer leverage, according to a report by JM Financials.
The report highlighted that the transformation in lending trends has evolved over several phases in the last two decades, with both banks and non-banking financial companies (NBFCs) playing a significant role. It stated, "Ongoing shift to retail loans is leading to an increase in consumer leverage." Between 2000 and 2010, the Indian banking sector experienced a decade of strong growth and product innovation. This period marked the emergence and expansion of retail banking. Products such as housing loans (HL) and business loans (BL) became widely available, with ICICI Bank playing a pioneering role in making these products accessible to a wider customer base. The following years, between 2010 and 2015, were marked by challenges. The sector experienced a slowdown as a significant portion of corporate loans were converted into non-performing assets (NPAs). This weighed heavily on the balance sheets of banks, limiting fresh lending. The report shared that, post-2015, demand for funding picked up strongly across various sectors, including retail, micro, small, and medium enterprises (MSMEs), as well as agriculture loans. Financial institutions once again began expanding their lending portfolios to capture these markets. This growth, however, has also led to higher leverage for consumers. The report also pointed out key differences in lending approaches between NBFCs and public sector banks (PSBs), particularly in the MSME segment. While PSBs usually follow a structured process of credit evaluation, focusing on cash flows, repayment capacity, and other financial parameters, many NBFCs have been observed to take on higher risks. Their lending practices often lack rigorous credit assessments, making their disbursements comparatively riskier. An ideal candidate for credit roles in both NBFCs and banks, the report stated, would be one with extensive geographical exposure and a deep understanding of local market dynamics, which is crucial for assessing business prospects. The report concluded that the financial system's tilt towards retail loans and MSME funding reflects the ongoing transformation in India's credit market, but it also underlines the rising leverage among consumers and the risks that financial institutions will need to balance going forward. (ANI)
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