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Commentary

Will There Be No More 0% EMI Schemes?

It seems – and we don’t know this for sure – that RBI is not happy about 0% EMI schemes. In these schemes, people pay on a regular basis (monthly), a smaller amount, rather than the full amount upfront. The 0% means they pay no interest, supposedly, so something that costs Rs. 40,000 can be paid in 10 months with Rs. 4,000 per month.

RBI doesn’t like this because banks, while offering such schemes, increase the “processing fee” to a high amount, which effectively is higher than the interest paid. These schemes are typically on a credit card and the credit card charges you money every month as part of their bill.

From Economic Times:

"Such schemes only serve the purpose of (luring) and exploiting vulnerable customers," the central bank said in a confidential note to banks on September 17. "These were found to be impinging on customer protection, accounting integrity and thereby the fair market practices which banks should epitomise."

The Con Job?

If you’re buying a small ticket item on an EMI scheme, and you pay processing charges that are higher than your interest costs otherwise, you’re being very stupid. There is no point in doing this, but there is a problem. Usually banks don’t mention these charges upfront, and that there is service tax to be paid on that fee.

But that applies to pretty much everything on their sales front too. I get ten calls a month asking me to convert a certain purchase into EMIs. They tell me the rate is 12% “reducing balance” which is like 8% flat. I tell them there is no such thing as flat because “flat” is a dumb concept created so that you feel you’re paying lesser money.

But they don’t tell me about processing fees until I ask them. If they charge 1% processing fees (or equivalent in rupees) and then service tax, the 12% loan just cost me a lot more!

But There Are Benefits

Come on, don’t tell me the 0% EMI scheme is bad universally. People tell you that you can get a 10% discount on MRP, if you pay upfront. This is possible in some cases. This is possible even if you pay cash rather than by credit card (2%). But it is more and more difficult to get. An online store won’t negotiate like this. A large format store will offer you a low price, but you can pay through EMI or credit card or cash (no difference).

We are increasingly becoming a society where you can’t negotiate that much at the retail level. So a price, with a 0% EMI is great.

But, you ask, why will the dealer not give you a discount, if he’s willing to pay for the EMI (the bank has to recover the interest from someone)?

In many cases, the bank recovers it from the manufacturer instead. A Samsung understands that customers are more likely to buy on an EMI scheme, so they might pay part or all of the interest applicable. This amount isn’t available to the dealer, so he can’t offer that as a discount. (Dealing directly with the manufacturer or a large distributor will help, but how many of us can do that?)

So, if the best price you can get is then available at 0% EMI, it’s a benefit for you! And since the goods are not affordable in one lumpsum (hurts finances) but can be made up over the longer term, why not?

Of Course This Will Hurt Sales

Yes, without an EMI scheme people are less likely to buy.

But if this is restricted to banks, then other companies (NBFCs) can offer these schemes. Telecom companies can offer phones on credit (that’s how they sell phones in the west). Even here, there should be no processing fees, just an upfront payment. But given that companies are loath to give direct credit and recovery mechanisms (legal) are very lax in India, this is unlikely in the short term.

But Only If The News Is True

Look, you may be a fan of the Economic Times, but sometimes they don’t really distinguish between fact and wild imagination.

I don’t even see a warning sign about this. If it’s a privately circulated note, that means RBI wants to get banks to be clearer about loan terms rather than stop 0% EMI schemes. It doesn’t mean you will not see 0% schemes anymore.

It could be news planted by manufacturers who don’t want to pay the fee anymore, and banks who can’t afford low interest loans to be given. Then, everyone can blame it on the RBI!

I’m a cynical fellow, so take my conspiracy theories with a pinch of salt.

  • Sanjeev B says:

    If the RBI really has consumer interest in mind, they should just mandate that all EMI offers have to declare the total cost to the customer before they signing up.
    This could be a simple table with dates in the first column and money to be paid in the second column, with a total at the bottom. The money column should include all setup costs as the first entry.

  • Alok says:

    Most consumer durables (apart from Cars / vehicles) are bought on this concept nowadays. I feel a very large part of the sales of smart phones (samsung, nokia, lenovo, apple iphone) that we have seen in recent past can be attributed to the 0% EMI schemes and exchange offers. Since these are not manufactured in India, this has put quite some pressure on imports and hence trade deficit. May be RBI is trying to curb the same indirectly by discouraging these schemes.
    Regards
    An equally cynical fellow and a fellow conspiracy theorist.

  • mangoman says:

    //Regards
    An equally cynical fellow and a fellow conspiracy theorist.//
    love that

  • bhupesh says:

    Is it not mandatory for banks to land above their Base rate? Does not 0% EMI scheme fall in this rule?

  • Murty says:

    Hey,
    Who is this trying to steal my Post of the “Equally cynical fellow”? Do not forget me, I am above all of you……Hehehheeh!
    0% friends? There is nothing like a free lunch. Remember the tussle betwen Samsung and the distributers last year? Samsung was unable to fight the black market through tonnes of material being shipped into India, and being sold by the distributors! These are crooks(For Samsung’s profits), who get the Set for half of the market price and offers you at the Market price in India, if not a 10-20% less than that. After realizing the issue, Samsung cut the Dealer Commissions. So, whether it is 0% or 8% or 10%, it is a matter of who is getting your money! You lose either the way, by purchsing a product worth 30% of the purchasing price….(You try to sell a 8 series or a 9 series TV)……
    The phenomenon is alarming for the manufacturer! By the regular sales routes, he expects certain profit, which was not reaching them…..So they become innovative! Innovative my foot% they add all such pricing into the semi-finsihed products and dump them into third world Countries…er……………..! Will they try the same in US/UK?????……
    They work on the most fastest assembly lines, but can not fight the greed of the underworld market….Or is it that they encourage such trade? Of late, a Sony TV(40″R452) is available at Rs40,000/-, when the dealer offers it at Rs.54000. In betwen, there are many players, like OLYX, Ebay, Flipcart, ……….But my point is , what is the actual price? Are we thinking about manufacturing cost alone?