- May 2014
- December 2013
Ruby Jacob, 26 Sep 2013
RBI has clamped down heavily on some immensely popular loan products and practices, which it finds are harmful for customers and can lead to accounting goof-ups in banks. The central bank has barred zero interest EMI schemes in credit cards and directed banks not to alter interest rate structure on loans where manufacturer has offered price discount. It has also called upon banks to terminate ties with merchants charging transaction fees from customers for debit card payments.
Zero percent interest rate EMI credit cards scrapped
Banks are expected to withdraw zero interest EMI scheme in credit cards totally, with yesterday's RBI circular. Such schemes are hugely popular in consumer durable goods like laptops, LED TVs, smartphones and home appliances where one can buy using credit card and pay EMIs with zero interest. It came across as a useful product for consumers who might otherwise find prices hard to afford at one go, however the catches lay elsewhere. For banks, the financing in zero interest EMI schemes come from processing charges, which are in the range 2-4% of the deal. If you annualize it, the actual interest on zero interest EMI schemes could be close to the usual 36% on credit card outstanding.
What's more, some banks are in the practice of adding commission expense, for direct sale agent in getting a loan customer, to the rate of interest.
Since RBI rules require that rate of interest and processing charge in banks should be uniform across a product or segment, irrespective of the channel how customers were acquired, both zero interest EMI scheme and the above practice have been banned.
Merchants not to charge transaction fee in debit card payments
Another widespread practice RBI has come down on is that of stores charging fee as a percentage of transaction value for purchase of goods or services when customer pay using debit card. Such fee is not permissible and banks have been directed to sever ties with such stores and establishments. Click here to read article on this.
Manufacturer sponsored price discount and moratorium on consumer loans
Often when manufacturers offer price discount on goods purchased through loan from a chosen bank, the bank adjusts for the discount by lowering interest rate. Similarly when moratorium period is offered, where interest payment begins only after specified moratorium period, banks again tamper with the interest rate without altering repayment schedule. RBI has asked banks to consider discounted price in loan amount without changing interest rate and in case of moratorium loans, to change repayment schedule instead of altering rate of interest. Rate of interest should be uniform in a product for all customers and the only factor, which can cause differentiation, is risk profile of customers.
Changes positive in the long run
Earlier in June, RBI had asked banks for clarification on some of these practices and products, which it observed posed threat to customers' protection and compromised banks' accounting integrity. Following that, it decided to ban completely some of the products and practices, as above.
We believe, these changes are in the interests of customers and fair accounting practices in banks. Although in the short run consumer durables sales could slight in the coming festive season, because zero interest EMI schemes will be withdrawn, ultimately these changes encourage transparency in loans pricing and help customers make informed decisions.