Now I look really ignorant, so I will first say, Sorry. And apologies to Economic Times.
I had said in an earlier post that ET was probably inventing the story that 0% EMIs will be banned, but they are now officially in a no-no land, with RBI’s new notification. It really says three things:
1. Pass On The Benefits, Charge Full Interest
Banks tell you there is 0% interest when you buy certain goods. But in reality there is no such thing. The manufacturer or dealer will give the bank the interest - it’s just that you don’t know how much. And you pay the full price of the product. Effectively, the manufacturer gave a discount to the bank instead. But the RBI says that distorts the understanding of the customer about what price he is paying and what rate of interest the loan is actually at:
In such instances, it is the responsibility of the banks, who are/may be using their good offices to get the better bargain, to make the customers fully aware of these benefits and also pass on the benefits to them fully and indiscriminately while sanctioning loan for the purchase. More importantly, this has to be done directly without tampering with the applicable rate of interest (RoI) of the product. If there is a discount offered in the price of a product, the loan amount sanctioned for the purchase should be after taking into account the discount, rather than giving effect to the benefit by reducing the RoI.
So now, if you were to pay Rs. 44,000 for a refrigerator at 0% interest for one year, RBI thinks the banks should do this:
a) Tell the customer he is actually paying Rs. 39,285 for the fridge if he takes a loan.
b) Then, tell the customer to pay the 12% interest that should really apply, which means he pays a total of Rs. 44,000 over the year.
Guess what will really happen?
Customers will say - wait, if I paid Rs. 39,285 right now, I can take the fridge no? I’ll do that instead, or wait till I save that money (why pay it to the bank!). Or, even better, I’ll pay the money, but I’ll take the loan from someone else.
Another problem is that while manufacturers are happy to do such deals with banks, they don’t want to do them with customers. One reason is that they feel they should maintain a certain price point in the market, and that price cannot be flexible based on whether you take a loan or not. With a certain MRP and then a much lower dealer price, every dealer will discount to the maximum they can; and without 0% EMIs sales will drop because people hate to pay interest.
This will result in a huge drop in sales, obviously.
But I like this change in the sense that it makes customers aware there is no free lunch, and then they can negotiate better because they see the real underlying prices. Since my only grouse was that customers couldn’t get that lower price anyhow, this change will ensure we the consumers see the real prices we pay.
Secondly, manufacturers are effectively paying commissions to banks, and charging a customer upfront; effectively banks aren’t revealing the real interest rate of the loan. This doesn’t allow for easy comparison or our own ability to understand if we can afford the loan. Opening up the interest rate might throw some surprises, like a bank charging 18% on what you thought was a 0% EMI scheme.
2. Don’t Hide Interest as Processing Fees
RBI has now stated that you can’t say a product is 0% EMI, and then charge a hefty processing fee. This again hides the real interest rate behind the product, so they say show that separately.
3. Don’t Let Merchants Charge Customers A Fee for Debit Cards
Banks charge merchants about 1% (limited by RBI diktat) for debit card transactions. Some of these merchants charge those fees back to the customer. That is not allowed, as the merchant agreement bans such an extra charge, and people tend to go back to cash when they must pay that much extra, which leaks both cash out from liquidity and also creates a money laundering situation (no taxes on cash?). RBI wants banks to terminate relationships with merchants that charge.
I wonder if this affects petrol pumps - who add the extra charge for both credit and debit cards.
And then, I wonder why only debit cards - surely, credit cards have such agreements too? (But the charges are higher, so RBI is okay with a pass-through, I suppose)
Impact: This will hurt :
Retailers - both online and offline. Companies impacted are Future Retail (Big Bazaar and Central), Shopper’s Stop, Trend (Landmark and Westside). While Flipkart continues to have the EMI schemes on, I believe that might go out too - even at other online retailers.
Banks - their credit card divisions will show a substantially lower consumer durable offtake, even if they follow the circular. The largest are HDFC Bank and ICICI Bank.
Durable Manufacturers: Negative for Videocon and Voltas. Possibly car manufacturers who wanted to offer low interest rates on loans. And mobile phone and tablet manufacturers (most are unlisted).
This will help:
NBFCs: They can carry on with their zero EMI offers, it seems, since the regulation applies only to banks. (But you never know). Good for Bajaj Finserv, Reliance Capital and the like.
The Current Account Deficit: (It’s not a stock) Most durables that hit the 0% EMIs seem to be imported (TVs, Cars, Mobile phones) So in one way a reduction in those sales will positively impact the current account.
Indian Banks in the US are already down over 2%. I wonder how markets will react.