The story behind zero per cent interest EMI schemes

Sep 30 2013, 13:06 IST
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RBI has noted that the interest element is often camouflaged and passed on to the customer as processing fee. RBI has noted that the interest element is often camouflaged and passed on to the customer as processing fee.
SummaryHere's a look at how zero per cent EMI schemes work, and if there is any benefit in them.

In April, Anita Singh, a 50-year-old housewife, purchased a microwave worth Rs 10,100 from a large retailer in Mumbai. The retailer lured her into a six-month easy payment EMI scheme at zero per cent interest rate on her bank’s credit card and told that all she was required to pay was an additional processing fee of Rs 500. Even though she had her savings to pay for it, she went ahead with the deal.

A careful look into the scheme now shows that while the bank converted her payments into six EMIs, she had to pay the initial two EMIs in the first month. So, effectively, it was six EMIs in five months and Rs 500 extra on the purchase of a microwave worth Rs 10,100. A simple calculation shows that the processing fee she paid works out to be an effective interest rate of 11.9 per cent for her purchase and that too upfront.

“I feel cheated. I thought I was being offered the product at zero interest rate but the processing fee is amounting to this high rate of interest,” said Anita, who is a hard bargainer and always looks to get some extra discount on any product she purchases.

Over the last few years, financing institutions, product manufacturers and retailers have come together to design schemes in a bid to make the deal look attractive to the consumer and make it convenient for him/her to pay in a bid to promote sales. However, as these schemes continued to evolve, they have become complex for consumers to understand the benefit and the interest he/she is paying to buy that product. In many cases, the consumer doesn’t even understand the final outgo from his pocket on such purchase.

The Reserve Bank of India, in a bid to keep things simple for the consumer, ensure more transparency on part of the manufacturer, the financier and the retailer and to protect the consumer from such complexities, issued instructions to commercial banks to desist from practices that thwart fair and transparent pricing of products including the most prevalent zero per cent loan and subvention schemes.

schemes on offer

As a means to attract consumers and push their sales, banks along with retailers and manufacturers had designed two types of zero per cent EMI schemes. In one they charged processing fee which RBI says is a way to camouflage the interest element in the loan and in

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