Planning to buy a phone or a television during the upcoming festive season? Don't bet on paying off the bill in interest-free instalments. These schemes are being withdrawn as the Reserve Bank has frowned on the practice of banks tempting consumers to make big-ticket purchases by offering to break up credit card payments into EMIs.
RBI feels consumers have been fooled by zero per cent or discounted interest rate schemes into believing that bank funding comes for free, and wants them stopped. Consumer durable manufacturers offer the zero per cent facility mostly on high-value products such as smartphones, LED TVs and premium home appliances.
"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."
ET has a copy of the note. There was no response from the central bank to queries regarding the note.
Festive Sales Likely to be Hit Due to EMI Move
The move by the central bank has panicked companies and retailers ahead of the festive season as nearly 20-30% sales depend on EMI schemes. They're worried that consumers will refrain from indulging in Diwali shopping sprees, especially after the surprise interest rate increase by RBI on Friday heightened concerns over home and auto loans becoming costlier. Looming over all of this is the growth slump that has got prospective buyers spooked anyway.
"The way forward for the measures suggested by RBI is justified, but the notice given is so short ahead of the festive season and in the middle of a dull economy, that sales are likely to take an instant blow," said Himanshu Chakrawarti, CEO at The Mobile Store, the country's largest cellphone retail chain with more than 700 stores.
What may have prompted RBI to examine the finer details of such schemes is the 34% jump in bank loans for buying consumer durables between July 2012 and July 2013 compared with a 12% rise in the year-ago period.
RBI said the interest component in a zero per cent scheme is often camouflaged and passed on to consumers in the form of a processing fee. The concept of zero per cent interest is non-existent and fair practice demands that the processing charges and rate of interest charged should be kept uniform across products and segments, it said.
The central bank has also barred banks from charging discriminatory interest rates on loans for all product categories that don't attract the zero per cent facility. It wants to stop the current practice where financing takes place on the maximum retail price of the product and not the market price, and wants banks to pass on benefits they get from retailers and brands to consumers.
When it comes to non-zero per cent schemes, retailers said banks charge consumers 4-7% interest, depending on the product value and tenor. That's much below the base rate, supposedly the minimum lending rate. "This vitiates the transparency in pricing mechanism, which is very important to take (an) informed decision," RBI said.
Senior officials at two leading retail chains said lenders, including SBI, Axis Bank and Kotak Mahindra Bank, withdrew the zero per cent facility late last week after RBI's note. Emails sent to ICICI Bank, HDFC Bank, Axis Bank and Kotak Mahindra Bank did not elicit any response.
Data available from retail chains shows State Bank of India charges 4.25% interest per year for a six-month tenor and 6.35% for nine months. HDFC Bank charges around 5.2% interest on six-month EMI schemes and 7.25% for nine months. For ICICI Bank, it is 4% for six months and 6-6.15% for nine months.
A leading Japanese electronics company has decided to put a complete stop to zero per cent EMI schemes, a senior executive said, adding this is likely to hurt sales badly. "There will be a big impact on sales since the contribution of such schemes to our sales had doubled to 20% in the last one year," he said, requesting anonymity. RBI has directed banks to make pricing transparent and inform consumers about the financial benefits they get from retailers and brands for offering zero per cent interest on credit cards or interest rate discounts.
"It is the responsibility of the banks, who are/ may be using their good offices to get the better bargain, to make the customers fully aware of these benefits and also pass on the benefits to them fully and indiscriminately. More importantly, this has to be done without tampering with the applicable rate of interest of the product," the note said.
Still, zero per cent schemes could make a comeback, just not in time for Diwali. It will take at least two months for banks to revive the plan since they have to make amendments to such offers in their own system as well as at the brand and retailer end, said the CEO of a leading multi-brand consumer electronics retail chain.
Meanwhile, RBI has also asked banks to terminate their relationships with merchants and retailers who charge an extra fee on debit card payments as this isn't allowed under bilateral agreements between banks and retail outlets.
Source: Economic Times
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