Is EMI a double-edged sword? Exploring the impact and top 10 banking stocks

In today’s fast-paced world, young people are changing the way they spend and save money. The rise of consumerism, combined with easy access to credit through EMIs (Equated Monthly Instalments), is affecting their saving behaviours.

The reasons behind this shift and how EMI culture is harming the savings habits of today’s youth.

• Instant Gratification Temptation: Consumerism lures young individuals with promises of immediate happiness through products and experiences. Advertisements and social media intensify this desire for instant gratification, diverting young people from saving for the future.
• Fear of Missing Out (FOMO): Social media fosters FOMO, compelling individuals to keep up with their peers’ lifestyles. This constant comparison drives young people to overspend on items or activities they can’t afford, depleting their savings.
• The EMI Effect: EMIs play a crucial role in encouraging excessive spending. These instalment-based payment plans make high-cost purchases seem affordable by spreading payments over time, leading young consumers to buy now and pay later without considering long-term financial consequences.
• The Affordability Illusion: EMIs create an illusion of affordability, with consumers focusing on monthly payments rather than the total cost. This perspective can lead to multiple EMIs, straining monthly budgets and hindering essential savings.
• However, what many may not realise is that EMIs play a pivotal role in credit creation, which, in turn, strengthens the banking sector.

Check: EMI Calculator for more

Understanding Credit Creation: Credit creation is a fundamental concept in banking. When a bank lends money to a borrower, it doesn’t merely transfer existing funds from its coffers. Instead, it creates new deposits in the borrower’s account.

The process of credit creation provides several advantages to the banking sector:

• Increased Lending Capacity: By continuously recycling funds through loans and repayments, banks can lend out more money. This expanded lending capacity can be c into supporting businesses, individuals, and economic growth.
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• Enhanced Profitability: Banks earn interest on the loans they provide. With more loans in circulation due to credit creation, banks generate higher interest income, contributing to their profitability.
• Resilience to Shocks: A well-functioning credit creation process can make the banking system more resilient to economic shocks. When banks have a broad base of loans and interest income, they are better equipped to withstand difficult economic conditions.

In conclusion, maintaining a balance between spending and saving is crucial. On an individual level, fostering a saving habit is essential. Simultaneously, injecting funds into the economy and promoting credit creation strengthens the banking sector, contributing to overall financial stability and economic growth.

Here are the top 10 banking stocks (based on 1-year performance):

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet, and is subject to changes. Please consult an expert before making related decisions.