RBI frown on '0% EMI' may curtail Diwali splurging

Putting a damper on consumer durables makers and big-ticket purchasers ahead of the Diwali season, the Reserve Bank of India's advisory against the practice of banks offering hire-purchase schemes at 0 per cent interest has already caused banks to start withdrawing such installment schemes.

The RBI feels consumers have been fooled by zero per cent or discounted interest rate schemes into believing that bank funding comes for free.

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 17 September. "These were found to be impinging on customer protection, accounting integrity and thereby the fair market practices which banks should epitomise."

In its operational circular issued last week, the RBI sought more disclosures under the zero per cent EMI scheme as it was worried about the "hidden costs" involved.

The 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.

Even as large banks such as the State Bank of India do not expect to see an impact on their portfolio on account of zero per cent schemes being phased out, consumer durable firms anticipate the measure would end up hurting most companies, forcing them to recalibrate their strategies.

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.