Here’s what you could find out about no-cost EMIs, how they’re priced, and what it means for shoppers and monetary establishments, as listed by ET.
Understanding No-cost EMI
No-cost EMI, additionally known as zero value EMI or interest-free EMI, is a financing possibility permitting the price of a product to be divided into EMIs with out incurring further fees past the agreed buy worth. This possibility is readily accessible each on-line and offline.
In the October 2023 Great Indian Festival sale, Amazon reported that one in 4 purchases was made utilizing EMI, and three out of 4 merchandise had been offered by way of no-cost EMIs. Despite the attractiveness of no-cost EMI, shoppers ought to keep alert to potential processing charges and hidden prices.
Hidden fees and pricing construction
No-cost EMI schemes promote 0% curiosity, however hid fees like processing charges reveal a special story. In 2013, the Reserve Bank of India cautioned in opposition to such schemes for breaching honest pricing practices. The time period “no-cost EMI” is misleading, as curiosity prices are embedded, whether or not seen or not. Manufacturers and retailers, not shoppers, bear these prices, impacting their revenue margins. Some offers might lack upfront fee reductions, affecting patrons. Zero % EMI on bank card outstandings usually hides curiosity inside processing charges.
The value is integrated into the EMI, although the breakdown might not be instantly obvious. This can affect the general value of the product, with sellers usually absorbing the curiosity element to draw more patrons.
RBI’s position in making certain honest practices
In April 2022, the RBI reiterated its name for transparency in changing bank card transactions to EMIs. It urged card issuers to obviously define the principal, curiosity, and upfront reductions earlier than conversion, looking for disclosures to stop disguising curiosity as zero-cost EMI.
Previously, the RBI found cases the place retailers charged prospects a price as a proportion of the transaction worth for items bought by way of debit playing cards. Deeming these charges “not justifiable” primarily based on bilateral agreements between buying banks and retailers, the RBI requested the termination of relationships between banks and such retailers.
Furthermore, the RBI emphasised that, for retail merchandise, rates of interest are usually uniform and not primarily based on particular person buyer danger profiles. Some banks had beforehand included bills like DSA fee incurred in mortgage sourcing within the rate of interest utilized to the product.
Benefits for lenders and sellers
Lenders and sellers derive benefits from the earnings generated by way of processing charges, even when shoppers benefit from reductions by way of EMI choices. The prices related to financing are included within the promoting worth of the product, permitting sellers to spice up their gross sales quantity. Although sellers might counter rising rates of interest by elevating product costs, shoppers expertise enhanced liquidity and can earn reward factors.
Impact of RBI’s elevated danger weight
The RBI’s elevated danger weight on unsecured loans, corresponding to private and retail loans, can affect no-cost EMI schemes. Elevated danger weights might lead to increased rates of interest on these loans, impacting sellers who would possibly increase product costs to uphold internet realisations.
