• Why Has RBI Banned the 0% EMI Scheme

    The 0% EMI scheme is viewed as a great benefit by most consumers. However, this method of repayment consists of a shorter tenure and hidden costs. The lender receives more than the regular interest rate from the borrower and the overall expense of the loan/ credit is higher than what is initially perceived. Recognizing this issue as well as various other factors and to protect consumers, the RBI has placed a ban on this EMI scheme. This is intended to ensure transparency is the pricing mechanism.

    Example: Person “A” buys a phone worth Rs. 40,000 at 0% interest on EMI for a period of 6 months. EMI amount is Rs. 6,667. The processing fee is Rs. 1600 and by paying the EMI for 6 months only, the borrower is effectively paying a flat rate of interest. This means that the interest will be calculated on the full loan/ credit amount and not based on the reducing balance method. Hence, person “A” would effectively be paying a 14.15% interest, unknowingly. Whereas, if he had purchased the mobile in cash he would have received a discount on the same. Alternatively, if he had purchased on an EMI at a regular rate of interest he would only have to pay a 10- 12% interest (depending on the lender).

    Factors Leading to RBI Ban on 0% EMI Scheme

    The following factors contributed to the decision of RBI to ban the 0% interest on EMI scheme:

    • Hidden Rate of Interest: Even though the scheme claims that there is 0% interest charged on the EMI, other charges make up for the interest component. It is mostly retrieved in the form of processing fee. This indicates that the scheme is using false claims to attract borrowers and exploiting the opportunity. Most banks are not allowed to offer loans below the stipulated Base Rate.
    • Artificial Demand Creation: Sales were higher due to this 0% interest on EMI scheme. This lead to artificial inflation of demand through purchases driven by sentiment. The ultimate consequence of this would be an economy with low growth and high rate of inflation. Once the 0% EMI schemes were banned, the sale of a lot of high-end consumer goods have declined.
    • Disparity in Pricing: The price of a product varies depending on the mode of payment – whether the payment is made via debit card, cash or credit card. Usually, the customer receives a discount when he/she opts for upfront payment in cash, for the product. This benefit is not offered to those who opt for an EMI scheme for repayment. Merchants also levy a transaction fee on those who wish to pay by debit/ credit card. Such pricing disparity also proved to be a major problem under the 0% EMI scheme.
    Calculate your EMI

    EMI repayment is a boon for those who wish to own long-term assets like a home, education, etc. These also offer benefits in the form of tax exemption. However, when EMI scheme is used for purchasing products with depreciation value like cars, gadgets, etc. the overall benefit is much lower. Added to this equation, the 0% EMI scheme makes the customer spend more and enter into a higher debt crisis. Based on all these factors that would negatively affect the customers as well as the economy, RBI has banned the 0% EMI scheme.

    Effect of the ban of 0% EMI scheme

    In order to create social awareness, RBI has notified banks and retailers to offer uniform interest rates and equated processing fees for selling any product to customers. RBI has also directed the banks to make customers fully aware of the benefits offered by the manufacturers during a festive sale. This move is directed to keep banks from taking advantage of the ignorance and sentiments of the customers and earning benefits in return. There are significant effects visible among customers as well as companies and banks.

    • On the customers

      With minimal understanding of the 0% EMI scheme and the benefit of buying the product without even having money through credit cards, customers actually tend to pay more interest than a normal EMI scheme while buying any product from retailers. So, the RBI’s move is beneficial for customers as unknowingly they get trapped into such rampant schemes where the debt amount becomes a lot higher than normal. This move has definitely created a strong awareness among the customers about the hidden factors of such unhealthy schemes.

    • On the companies

      With the ban of 0% EMI scheme, the consumer goods manufacturers and banks in the country are a little on the back foot. A report says about 20-30% of the sale of consumer goods such as TVs and other gadgets take place through 0% EMI schemes during the festive season offer periods. The sale percentage has fallen down after the RBI notification. Customers have become more sensible to opt for such schemes by keeping their sentiments aside.

    • On the economy of the country

      With the downfall of the sale of consumer goods, the overall sale has also been affected which, of course, affects the national economy. However, in the long run, it foreshadows a positive change since consumers can now take informed decisions without being misled by the banks. Customers can differentiate the need that is driven by sentiment and the need of an actual requirement of any product. This will restrict the demand to some extent and control the inflation rate which will ultimately lead to the growth of the Indian economy in the long run.

    News About Why Has RBI Banned the 0% EMI Scheme

    • Foreign banks turning selective might result in loans for Indian firms to get costlier

      For more than a decade, Indian banks have been enjoying the cheapest foreign currency loan costs. This is all set to change as the banks are now starting to become more selective. It is expected that the fortune for the Indian companies in the offshore loan market is all set to end soon. This is just at the time local lender who are dealing with a lot of non-performing debt start to grow pickier. This has made the borrowers become increasingly reliant on international creditors. The monetary tightening by the Federal Reserve will also be pushing up the dollar rates. It was conveyed by United Overseas Bank in the month of May that the country might be looking at a turning point for loan pricing. It has been a borrower’s market so far this year where Indian companies have paid average margins of 118 basis points on five-year dollar syndicated loans. This was lowest recorded since the year 2005 according to data from Bloomberg.

      22 August 2018

    • RBI planning to modify loan rule for large borrowers

      The Reserve Bank of India has recently come up with new guidelines to enhance the discipline among the large borrowers. The draft guidelines specifies a minimum ‘loan component’ in fund-based working capital finance. The draft also specifies mandatory Credit Conversion Factor for the portion of cash credit availed by large borrowers that is left undrawn. A minimum level loan component of 40% shall be effective from 1 October 2018 for borrowers having a working capital limit of Rs.150 crore. The ‘loan component’ should at least be 40% of the fund-based working capital limit.

      13 June 2018

    • RBI expected to maintain status quo on policy rate at the 5 April MPC meeting

      The Monetary Policy Committee is set to meet on 5 April for its bi-monthly policy review. The Reserve Bank of India (RBI), however, is expected to retain the same policy rates despite the banks hiking their deposit rates and lending rates. State Bank of India had recently increased its deposit rates by 50 basis points and its marginal cost based lending rate by 25 basis points, effective from 1 March 2018. The inflation is going down at 4.4% and the bond yields have eased after the announcement of lower borrowings by the Indian government. Financial experts and economists expect the RBI to maintain the repo rate at 6%. The last repo rate cut by RBI was in August 2017 by 25 basis points to 6%.

      4 April 2018

    • RBI to inject extra liquidity into the banking system this March

      The Reserve Bank of India (RBI) has announced that it will infuse a short-term credit amounting to Rs.1 lakh crore into the banking system to keep short term-rates under check. This is likely to benefit the borrowing companies. “In order to address additional demand for liquidity and with a view to provide flexibility to the banking system in its liquidity management towards March-end, it is prepared to inject adequate additional liquidity….,” RBI said in a release. This will be an add-on to the normal Liquidity Adjustment Facility (LAF) operations. Starting 06 March 2018, RBI will conduct four variable repo operations of Rs.25,000 crore each. Following this announcement, Senior Vice President of ICRA, Mr. Karthik Srinivasan said that the extra cash infusion into the system should help in capping the short-term rates as well as control the short term rate fluctuations for the rest of the month.

      12 March 2018

    • RBI to inject extra liquidity into the banking system this March

      The Reserve Bank of India (RBI) has announced that it will infuse a short-term credit amounting to Rs.1 lakh crore into the banking system to keep short term-rates under check. This is likely to benefit the borrowing companies. “In order to address additional demand for liquidity and with a view to provide flexibility to the banking system in its liquidity management towards March-end, it is prepared to inject adequate additional liquidity….,” RBI said in a release. This will be an add-on to the normal Liquidity Adjustment Facility (LAF) operations. Starting 06 March 2018, RBI will conduct four variable repo operations of Rs.25,000 crore each. Following this announcement, Senior Vice President of ICRA, Mr. Karthik Srinivasan said that the extra cash infusion into the system should help in capping the short-term rates as well as control the short term rate fluctuations for the rest of the month.

      9 March 2018

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