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Will BNPL Lead to a Rise in Consumer Debt?

The pandemic has ravaged the economic standing of India. With the financial woes of the country exacerbated, the financial standing of an individual has reduced significantly, and this has led to a high consumer credit demand. This situation has occurred because of increased expenditure due to the pandemic and burgeoning inflation that has burned a hole in the pockets of the consumers. Along with the rise in consumer credit demand, liquidity is on a rising scale as well. Therefore, increased liquidity, easy credit, and the crippled financial standing of the public due to the pandemic and the burgeoning gasoline prices in the economy, it is quite clear that the credit bubble will be on the rise in the future and that the future looks grim.

The credit bubble theory

In recent times, this diabolical credit bubble has been expanding due to the “Buy Now, Pay Later” scheme that has taken the financial world by storm. Given the immense need for credit with enhanced accessibility, it can be noted that the popularity of such options is gaining momentum in the economy. But with the higher prospects of financial fallout soon, various analysts have vehemently warned people of greater default risks in the future.

Easy credit- the recipe for disaster

This leads us to a pertinent question. What detestable characteristic of the BNPL system will give rise to the consumer debt bubble in the economy? It is to be noted that easy credit in the economy is possible due to the lack of credit checks and an “opaque” debt reporting system. With low non-scrutinization of consumers’ credit history, credit is being distributed without any significant collateral. In fact, the unregulated system of BNPL will lead the lenders to underestimate the borrowers’ debt levels while effectively assessing new loan applications. Thus, the easy credit system is based on the fragile monitoring mechanism.

The vicious cycle of the BNPL sector

The BNPL system can give rise to the vicious cycle of debt recurrence and restructuring. Given the rise of easy credit, more people will be lured into incurring more credit card debt, which in turn will lead to overspending and another loan to pay off their previous “Buy Now, Pay Later” obligations. This can give rise to the vicious cycle of the credit bubble,

Which will spill its spoils over the entire financial and banking sector if it manages to fall out. This will be problematic, since these sectors are still trying to manage their NPAs. What makes the whole mechanism of BNPL even more contentious is the fact that the BNPL system is well integrated into the economy. This is mainly due to the integration of the system with retailers, operating online and offline.

It is no news that given the easy credit characteristic of the system with no collateral checks and a repayment mechanism, the system is quite a recipe for disaster. The need of the hour, in that case, is to mitigate or rectify the crisis in making. This becomes an important issue to be tended to as the banking and the financial sector are already trying unsuccessfully to mitigate their NPA crisis. Thus, another potential fallout cannot be afforded. The banking sector needs to be strengthened in terms of its core functions like lending and as such, regulation of the BNPL sector is the need of the hour.

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