RBI bans zero per cent interest scheme

Mumbai: The Reserve Bank of India on Wednesday asked banks to discontinue the zero per cent EMI (equated monthly instalment) scheme on retail products, saying that it violates the fair and transparent pricing practice of products for the customers. The banking regulator also said that no additional charges can be levied on payment through debit cards.

add_main_imageIn the zero per cent EMI schemes offered on credit card outstandings, the interest element is often camouflaged and passed on to customer in the form of processing fee.

RBI said that since the very concept of zero per cent interest is non-existent and fair practice demands that the processing charge and interest rate charged should be kept uniform, such schemes only serve the purpose of alluring and exploiting the vulnerable customers.NextMAds

The EMI scheme on smartphones is one such example. Since January, consumers have been flooded with EMI schemes for smartphone deals. Though the mobile manufacturers and the banks advertise that there is no charge, the fine print makes it clear that banks charge a processing fee on select smartphone products and for select tenure. As the processing fee adds to the cost, it makes the 0% interest claim false.

The average processing charge is in the range of 1-8.75% on the principal amount for three-months to nine-month period.

The central bank said that the only factor that can justify differential interest rate for the same product, tenure being the same, is the risk rating of the customer, which may not be applicable in case of retail products where the interest rate is generally kept flat and is indifferent to the customer risk profile.

The notification also states that discounts on price or moratorium period for payment are often offered by the dealers or manufacturers on their products to the customers while they make the purchase by taking loans from banks. In such instances, RBI says, it is the responsibility of the banks 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.

RBI said that it has to be done directly without tampering with the applicable interest rate 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 interest rate.

Thus, in principle, banks should not resort to any practice that would distort the interest rate structure of a product.sixthMAds

RBI also cited instances where merchant establishments levy fee as a percentage of the transaction value as charges on customers who are making payments for purchase of goods and services through debit cards and said such fees are not justifiable and permissible as per the bilateral agreement between the acquiring bank and the merchants. It has called for termination of the relationship of the bank with such establishments.