Understanding the Potential Risks of Consumer Lending Bubble in 2023

Just like the financial crisis in 2008, 2023 is showing impending signs of a consumer lending bubble burst.

The 2008 Financial Crisis: A Quick Recap

• The 2008 financial crisis resulted from banks providing mortgage loans to individuals who couldn't afford repayment.
• Banks overly hedged on the hypothesis that real estate prices would continually ascend, prompting them to dish out more loans.
• This eventually led to the collapse of the housing market and extreme losses for institutions such as Lehman Brothers, the then-fourth largest investment bank in the U.S.

The Current Scenario: 2023

• Today, a similar pattern is unfolding, urging both the government and the Reserve Bank of India (RBI) to be cautious.
• An escalating wave of consumer borrowing, underpinned by easily accessible finance options, is driving an expanding consumer lending bubble.
• The RBI is in the process of implementing measures to mitigate a potential financial crisis.

Here are the three core aspects examined:

The Size and Growth Rate of the Bubble

• Notably, in India, the growth rate of consumer lending is ranging from 23% to 25%.
• RBI's concerns regarding this trend are valid given the sheer size and rapid expansion of consumer finance.
• The situation has prompted corporations to delve into the realm of lending, escalating its growth.

The Ability of the System to Absorb the Shock

• Since the 2008 financial crisis, the system has strengthened, improving the capacity to absorb potential shocks.
• The Quantum Easing (QE) technique developed by world governments offers a remedy to offset economic damage by printing more money, thereby safeguarding investors.

The Role of Government Amidst the Looming Crisis

• The Indian government has historically demonstrated caution, as seen during the 2008 financial crisis under Mr. YV Reddy, the then RBI Governor. His decision to increase provisioning requirements for home loans insulated India from the severity of the global crisis.
• Currently, the RBI has increased the risk weight of consumer loans from 100% to 125%. This proactive measure is designed to prevent lending institutions from recklessly issuing loans.

The significant drop in stock prices has made investors anxious about the future of financial institutions, especially for companies like SBI cards and the like. However, it's crucial to understand that these measures taken by the RBI, though appearing restrictive in the short term, carry long-term benefits.

To mitigate possible financial losses, investors should take a diversified approach by investing in different types of assets like bonds in addition to equities.

Key takeaways:

1. A consumer lending bubble is forming, similar to the housing market bubble in 2008.
2. The Reserve Bank of India (RBI) has taken measures to protect against a potential financial crisis.
3. Diversification of financial investments can help mitigate risks.

In conclusion, while the risk of a consumer lending bubble is indeed growing, preventive measures are in motion. So, whether you're an investor or an individual considering getting a loan, it's essential to be mindful of these factors.