Nothing can define the volatility of the credit market as well as the financial meltdown of 2008. With the introduction of Basel III norms, which was designed to meet the deficiencies of the market and designed to boost liquidity and reduce leverage in consumer banking systems, the global credit market has been picking up gradually. The credit market drives all financial markets – be it the commodity market, derivatives market or the equity market. And as at point all these markets are interlinked, any change in one is sure to have effect on the other market, which explains the element of volatility in the credit market.
In this piece, we are analyzing how customer credit or consumer debt is influencing the global credit market; and to what extent is it contributing to its volatility. To begin with, consumer debt includes purchases that are made with lines of credit, credit cards, and loans. Usually this credit is used to buy non-investment services that are consumed or goods that depreciate quickly. As a prominent consumer banking product, consumer debt ensures that the business is widely dispersed among the large customer base, and the bank can administer a large credit portfolio.
What’s driving the future of the consumer credit market?
One major factor which is sure to influence the future of consumer credit market is portfolio risk solutions. This is one solution which is provided by several global consumer banking institutes in order to track real-time pricing, capital management of multi-asset portfolios and offer a transparent and detailed solution to clients so that they can buy products and services from specific banking and financial institutions. This practical process of pricing the products and solutions helps to manage individual portfolios and avoid firm-wide risks through consistency, automation and transparency.
Banking institutes, be it private or public ones are now readily providing credit to marginalized borrowers such as small and medium-scale enterprises which was not possible in the traditional banking framework. This was mainly due to the lack of high quality collaterals and long credit histories, as these firms are often associated with higher risks. Easier access to credit has brought in two features in the picture. Firstly, on the one hand it has brought in liquidity into the system, bringing in credit transformation for business of various types and sizes. Secondly, it has also added the element of volatility in the consumer credit market. The way in which these two features will sync and work out can be determined only in the forthcoming years. But there is no denying to the fact that it has opened up the doors for growth and higher competition.
The final aspect which is driving the consumer credit market is the emergence of micro-enterprises in the emerging economies. This is especially observed in case of China, India, Thailand and Nigeria. These economies have understood that micro-enterprises do play a vital role in linking up the entire chain of economic growth by bringing those at the grass root level into the credit market scenario. This way, not only do micro-enterprises generate employment, but they also add liquidity to the global credit market.
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