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.

the other (subvention scheme) they did not charge the processing fee or anything from the consumer and the interest component to the card issuer was paid by the merchant or the manufacturer.

In case of zero per cent EMI schemes, RBI has noted that the interest element was camouflaged and passed on to the customer in the name of processing fee and in some cases they would also load direct selling agents commission in the interest rates thereby making it complex for the consumer.

“Since the very concept of zero per cent interest is non-existent and fair practice demands that the processing charge and RoI (rate of interest) charged should be kept uniform product/segment wise, irrespective of the sourcing channel, such schemes only serve the purpose of alluring and exploiting vulnerable customers,” said the RBI.

Several card issuers have already discontinued such schemes and say that it was not in the best interest of the consumer.

“I fully agree with RBI’s advisory to discontinue the scheme that charged interest rate in the guise of processing fee etc and we have already discontinued that scheme,” said Pallav Mohapatra, CEO, SBI Cards.

The RBI has also issued advisory against zero interest EMI schemes (under subvention schemes) that do not have any processing fee but card issuers say that the only issue that may be upsetting the regulator is on the front that card issuers do not tell the consumers upfront that the interest to them will be paid by the merchant or manufacturer for their purchase.

Card issuers are also looking to approach the RBI to let them continue with the subvention schemes as its benefits everyone and they will on their part make full disclosure to consumers that interest payment for their purchase is being taken case either by merchant or the manufacturer.

The RBI has, however, argued that under the subvention scheme it is banks’ responsibility to make consumers fully aware of the bargain that they would get from the manufacturer or retailer and also pass on those benefits fully and indiscriminately.

“Thus in principle, banks should not resort to any practice that would distort the interest rate structure of a product as this vitiates the transparency in pricing mechanism which is very important for the customer to take informed decision,” said the RBI.

While some say that stopping such schemes would lead to a cut in spending of up to Rs 20,000 crore per annum, some

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