No more 0% interest on EMIs

The bite due to the economic slowdown is getting worse by the day. Thanks to the rupee depreciation, the power of the wallet is already shrunk. And if you were hoping to steal some hedonistic pleasure by tapping out your credit card this festive season, there is a spoiler alert as well. The Reserve Bank of India has now issued guidance to banks to put an end to zero percent interest on EMI (Equated Monthly Installments) facility available on the purchase of consumer durables given out by various credit cards.

So why did the RBI play party pooper? According to various media reports, the RBI had cogent reasons to frown upon such a practice, which appears to have become a raging consumer trend. A leading financial daily said in its report that the RBI believes that "Such schemes only serve the purpose of (luring) and exploiting vulnerable customers. These were found to be impinging on customer protection, accounting integrity and thereby the fair market practices, which banks should epitomise."

Nowadays, almost everything from cars to home appliances to LED TVs and smartphones are available under these lucrative schemes. Moreover, several companies have used these schemes to goose up their sales significantly. For instance, Apple and Samsung have sold thousands of iPhones and Galaxy phones respectively in the recent past by luring customers with such schemes. The market, acting on cue, has embraced these schemes with a fervor bordering on the messianic. Even customers believe that they get a profitable option by buying into such schemes. However, the RBI opines that customers opting for these schemes actually end up losing money instead of gaining.

The RBI’s decision to withdraw the schemes will come as a big dampener to companies looking to beat the economic slowdown by ramping up sales during the upcoming holidays. Himanshu Chakrawarti, CEO, The Mobile Store, speaking to The Economic Times, stated that "The measures suggested by RBI are justified, but the notice given is so short, ahead of the festive season, and in the middle of a dull economy that sales are likely to take an instant blow.”

The apex bank began its scrutiny into these schemes after the revelation that the prevalence of such schemes increased by 34% from July 2012 to July 2013. In the preceding year these schemes witnessed a growth of only 12%. Naturally, the RBI was forced to act the tough cop and its decision to disband such schemes is intended to send down a terse message to the public. Such schemes are actually a fraud perpetrated on the people becausethey indirectly levy a processing fee. Moreover, if a customer purchases anything by paying cash upfront then retailers provide a certain discount on the MRP (Maximum Retail Price). But products are sold at their MRP value if you opt for schemes with zero percent interest on EMI.

Thanks to RBI’s initiative, two prominent banks have already terminated the facility. More banks will likely follow suit, which will help people in the long run. After all, it is better to be safe than sorry.