The story behind zero per cent interest EMI schemes

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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.

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 manufacturers say that it won’t impact much.

“While only 25 per cent of consumer durable secondary sale is through consumer finance, 75 - 80 per cent of automobile secondary sale is through consumer finance. Hence, impact is more on automobiles not durables. Also, consumer durable finance is primarily through NBFCs, not banks, while automobile finance is routed majorly through banks,” said Deba Ghoshal, marketing head, unitary product business group, Voltas.

Other than these, the RBI has also instructed banks to put a curb on the practice where merchant establishments levy fee as a percentage of the transaction value as charges on customers while they make payments for purchase through debit cards. “Such fee are not justifiable,” said RBI adding that this calls for termination of relationship of bank with such establishments.

The RBI has raised an alarm once again to protect consumers but one needs to be careful on occasions when retailers dangle schemes which may look attractive but may ultimately prove to be a bad financial decision.

Buyers, therefore, need to be very careful before falling into the zero per cent interest rate trap and spend some time doing their maths in order to understand how much they are paying for a facility that looks very attractive from the outset.

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