Mumbai, Sept. 25: The Reserve Bank of India (RBI) today took a significant step to protect customers from paying hidden or extra costs when they purchase goods through bank financing at zero per cent interest rate — it barred such schemes altogether.
The apex bank also said no additional charges be collected by a merchant establishment when payment was made through debit cards.
The RBI’s directive on zero per cent finance schemes, which have been popular among customers, retailers and consumer goods companies, is a mix of good and bad news for those eyeing that smartphone or an LED TV during the festival season.
On the positive side, it will mean that a customer will not have to pay a hidden interest cost. However, the individual will now have to either swipe his credit card (and pay interest on his outstanding amount every month) or pay the money upfront.
It also means non-banking finance companies, who offer 0 per cent interest finance, will have to charge some interest on these loans. The RBI diktat could hurt sales of organised retailers and consumer durable firms as well. It is estimated that nearly 30 per cent of sales are on account of these popular schemes.
A major reason for the scheme’s popularity was that consumers were told that they would not have to pay any interest on the loan. He would have to simply divide the cost of the product by the loan tenor, pay a few instalments upfront along with a nominal processing fee and buy the item.
However, there were certain hidden costs. For example, if an individual decides to buy a TV set that costs Rs 50,000 (EMI Rs 8,333 for six months), he was told to pay a processing fee of Rs 1,000. The customer was also told that as he was purchasing the product at 0 per cent interest financing, a cash discount of Rs 2,000 that would have been otherwise offered to him would not be given.
The consumer, therefore, pays Rs 51,000 for a television set that could have cost him Rs 48,000. So he pays an additional Rs 3,000 because he opts for the financing scheme.
It is this hidden cost that the central bank objects to.
The central bank said in the zero per cent EMI schemes offered on credit card outstandings, the interest element is often camouflaged and passed on to customer in the form of a processing fee.
The RBI also cracked down on the practice of a few merchant establishments to levy a fee, as a percentage of the transaction value, as charges on customers who make purchases through debit cards.