RBI bans 0% interest scheme on purchase of consumer goods

[Roxtin]

And nowadays youngsters in family always have a cellphone better than yours

 

[onlyravi]

This step by RBI is just to stop the cash outflow and try to divert the cash either in savings or in reducing the "buy on emi even if you cannot afford mentality".... In a way I see it as a welcome move.
Benefits as I think:
1) Volume of consumer durable sales will go down even on the face of festivals like Dussera and Diwali.
2) Prices of consumer durable will consolidate to some levels and the people who are really out to buy something will get better deals.
3) Might bring down the dollar price. (not sure exactly how but if foreign brands face slump sales then automatically nation's money stays in the nation).

I am not a financial expert and what I have noted above could be total BS in real world but that's just my opinion. If I am wrong educate me.... just mocking wont help

Malls and huge retail spaces are growing like mushrooms. They wont pay from their pockets. They all are just trying to exploit the weak consumers who are caught in this match making physiology.
Like buying a LCD even when the existing TV is working just fine only because their neighbor or friend bought one and now they can equal him taking help of some cheap finance options.
Buy a new mobile just coz the other guy in college bought one which is bigger and louder. Same with bikes, furniture, vacations, you name it.....
Slowly slowly we are moving towards the USA mentality of spending first and earning later. We all know what happens in such situations.
This is a dangerous trend. Even the house keeping guys in my company have branded (Samsung/MMX/ HTC) mobiles and they use 3G ... lol.... (Yes 3G is not a cheap thing guys)...
Every tin hut you see across various slums will have DTH connections and just go to a nearby shop where DTH and mobile recharges are done .... Stand there for 30min any evening and you will find out how many "chota recharges" happen both for mobile and DTH. Its crazy. Its addiction..... And they say weed was addictive
I dont deny that every person rich or poor is eligible to every facility they are paying for. But what cost they are paying has to be understood. These house holds live a hand to mouth life and the money which otherwise they could have saved for health care/ rainy days/ for childs future/ some postal schemes is now being washed away in this typhoon of stupid "luxuries" like DTH/Mobiles/LCDs etc.

 

[blr_p]

I am not a financial expert and what I have noted above could be total BS in real world but that's just my opinion. If I am wrong educate me.... just mocking wont help

That the overall intent by the RBI with this action is to curb demand was my feeling too.

Does it mean no more low interest with installment options ? not necessarily but that is yet to be clarified.

It seems RBI is challenging 0% interest offers and saying its not really 0% and that is it dishonest to claim such. Anybody that scrutinises an offer will be able to see whether it really is true or not. Why does the govt need to step in and intervene.

If you take an EMI you can see how much the monthly payments are. Is that the full amount or are there extra hidden charges on top. Only if you don't make the payment as agreed is my understanding. Then interest kicks in and depending on the card can get more expensive. So i guess the real cost of EMI is not when you can make the payments but rather how much more it will be if you cannot.

 

[amohit]

Well, in last one year I made 3 purchases on 0% EMI option. All three were 3 months EMI. 0% interest. No processing fee purchases. All I paid every month for 3 months was 1/3rd the amount mentioned on invoice. To me this move looks like a move to curb consumer spending rather than benefiting the consumer in any way. If he was so interested in consumer benefit, he should have made it mandatory to have more transparent terms and conditions for EMI based purchases.

Regards,
Mohit

 

[ashishsahu]

Main creteria for rbi must have been to curb inflation as around 30 % of consumer durables are sold through 0 % emi. Then too the move is flawed as it applies only to credit card holders which form a small percentage of that 30%.

Major player in this emi business is bajaj finance which provides the facility even paid by cash.

Btw snapdeal is still showing 0 % interest, processing fee option

 

[babhishek]

Course he would, take the s4, pay in a lump sum and its more expensive, go 6 month emi and avail a 15% cash back that to at no interest, so there's an extra savings. 41k becomes 34k.

that is an apples to pears comparison, you could still pay the 34k down, without the emi. but a nice offer none the less....
my point being, when one can afford to pay the full amount, it makes sense to go for emi as well, however the EMI does make wannabees commit to phone due to perceived ease of financing, which turns out to be not that wise a decision ( since a majority of the people going for EMI's cant afford the down payment)

so its a majority ( non affoordability) vs minority ( can afford, be smart and utilise the EMI option ) benefit...

 

[Party Monger]

This is a great directive in terms of transparency.

No banks/commercial outlets give you actual 0% scheme. The interest rate (whatever it is) is factored into the price. So assume the minimum sale price of x commodity is 9000, assume interest is 500. So you could get it at 9500 with zero interest or 9000 with interest.

I prefer the second option. Its less gimmicky and more clear. You arent lured into buying but rather presented with facts. Off late with companies coming out with various ways to get you to spend, this goes along way in showing people whats the actual costs and whats interest.

As for those who shout caveat emptor, well if you are out shopping would you like to have your guard up all the time and keep reading the fine print or would be just easier to have things transparent?

Ofcourse this also helps the pattern of over-consumption and helps the economy and you get ACTUAL good deals instead of gimmicks.

 

[ashishsahu]

^^^ many outlets give the same price as you would have got by paying cash. for ex: snapdeal. any product above rs 4000 enables you to pay by EMI w/o a single paisa extra. you can check out the site for yourself

 

[Party Monger]

^Famous online shops are burning VC money/margins and represent a very small fraction of those offering these. Go offline and see the shops that offer these schemes. They will first tell you the 0 interest rate and when you ask them for the normal price they'l say the same rate. And then when you force them to lower and they know you want to pay full, they'l tell you the actual rates. Recent experience with a few products.

Its simple maths, think about it. If a shop keeper finances from his own pocket for 6-8 months, think of the capital he'l need assuming a sale of even just 50,000 everyday. That capital wont come without a cost. Either they hide the cost or they write off the cost over those that do downpayment too. Which tends to collapse since everyone will then go for installments.

 

[blr_p]

^so how are they getting that capital then ? because people have already said if you stick to the schedule you don't pay more than what was agreed to earlier.

Somebody is getting screwed, it ain't us, maybe its the govt.

 

[6pack]

Its always the customer who's getting screwed. There's no such thing as free lunch in business. I don't know how they manage it, but seems that maybe they have some sort of understanding with the companies. The companies will probably markup the products prices during initial sales and give zero% emi schemes along with help of card companies. The card companies probably earn through processing fees etc. Shopkeepers (the brick and mortar ones) keep their prices near to online ones mostly. So probably shopkeepers are earning more margins now.

 

[Onemufc]

Banks provide the free EMI not the merchant. Once you swipe the card the merchant gets that money.

Ques: How does the bank earn then?
The basic logic of credit cards are that more you spend the more are your changes of defaulting. EMI are just another way of inclining you to spend money which you would not otherwise.

I may be wrong.

 

[ashishsahu]

^Famous online shops are burning VC money/margins and represent a very small fraction of those offering these. Go offline and see the shops that offer these schemes. They will first tell you the 0 interest rate and when you ask them for the normal price they'l say the same rate. And then when you force them to lower and they know you want to pay full, they'l tell you the actual rates. Recent experience with a few products.

Its simple maths, think about it. If a shop keeper finances from his own pocket for 6-8 months, think of the capital he'l need assuming a sale of even just 50,000 everyday. That capital wont come without a cost. Either they hide the cost or they write off the cost over those that do downpayment too. Which tends to collapse since everyone will then go for installments.

I have first experienced offline then online. I think you haven't seen many offline stores that do offer deals like this. Even brick mortar shops offer the same price many times as they don't finance themselves. There's always a nbfc financing it like bajaj finance, future capital. And these do offer 0 % processing & interest free emi. They take the address proof and pan card phtocopy that's it. No proof of employment or any kind of cibil score.

 

[Party Monger]

I have first experienced offline then online. I think you haven't seen many offline stores that do offer deals like this. Even brick mortar shops offer the same price many times as they don't finance themselves. There's always a nbfc financing it like bajaj finance, future capital. And these do offer 0 % processing & interest free emi. They take the address proof and pan card phtocopy that's it. No proof of employment or any kind of cibil score.

Really? So Bajaj offers you an EMI at zero percent interest, for a whole year, and you think they don't earn anything? My friend, I've been to plenty of shops. Not just now but Bajaj has been financing for years. Previously they had "processing fees only" which was about interest at around 10-15% for a year, now there is nothing. So did they suddenly turn altruistic? Charitable perhaps?

I don't know the inner workings but I do know that you cant conjure money out of thin air. There are a few possibilities -

> Companies might have tie-ups with financiers like bajaj on a high level where they average out the cost of the loan over everything they sell so that it feels like zero interest but the cost for those who buy on full down payment increases.

> They charge the shops a certain percentage of the profit and they shop keepers obviously go along cause of much higher sales.

There are a few more ways it could work, but that's the gist. I prefer things to be clear rather than not. Your opinion could be different. RBI is one of the only institutions left in India that functions properly and has a shred of dignity left. Lets not malign them for things that make the consumer market transparent.


Ps- Issue of earning on non-payment on credit cards is true, but even there they shops are charged 1-1.7% charges for the month on the card swipes. Rest of the money comes from defaulters who are charged astronomical rates. Last I calculated defaulting for a year attracts interest in excess of 30 percent(after compounding and being charged monthly at around 5%(right?). So that bit is definitely true. Not for financers like bajaj but likes of ICICI and other bank that give credit card emi.

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Again if some has the exact idea of the inner workings please do share. I refuse to accept that there is a free lunch here, in consumer goods, of all places.[DOUBLEPOST=1380310739][/DOUBLEPOST]

^so how are they getting that capital then ? because people have already said if you stick to the schedule you don't pay more than what was agreed to earlier.

Somebody is getting screwed, it ain't us, maybe its the govt.

They aren't. Thats what im saying! You dont run a business like that. Its only the VC's that take sort of risk. The rest I think use any of the above or some other more brilliant method.

 

[6pack]

If I were a vc, I wouldn't let the company use such schemes, unless there was some way to earn from it. If the interest was really zero, the company won't earn on the sales a much as it would earn in a direct sales approach. The companies money would be locked for that time.

Let's say the company has a tie up with some bank. Why would a bank, whose primary goal is to earn money by any means forego interest rates on short term loans like these is beyond my imagination. The point I'm trying to put forward is, everyone is getting something from this. Else they won't risk their money in it. If it really was such a good deal, why don't they extend it to home or car loans?

 

[mk76]

"We will approach RBI to see if they agree to the scheme if we communicate to the borrower that the funding is coming through discounts by the manufacturer or retailer," said the head of credit cards at a private bank.

... however

According to banks, retailers may not agree to disclose the discounted price out of fear that this might lower the brand's worth among those paying upfront. "We do not think RBI should have concerns on credit quality as defaults are much lower than in earlier years. Also there is no consumer bubble as smart phones and laptops do add to productivity," said a banker"

reference

 

[blr_p]

I don't know the inner workings but I do know that you cant conjure money out of thin air. There are a few possibilities -

> Companies might have tie-ups with financiers like bajaj on a high level where they average out the cost of the loan over everything they sell so that it feels like zero interest but the cost for those who buy on full down payment increases.

> They charge the shops a certain percentage of the profit and they shop keepers obviously go along cause of much higher sales.

There are a few more ways it could work, but that's the gist. I prefer things to be clear rather than not. Your opinion could be different. RBI is one of the only institutions left in India that functions properly and has a shred of dignity left. Lets not malign them for things that make the consumer market transparent.

The markup compared to cost for some products like phones is almost twice what it cost. As products get imported in large numbers. To sell more phones than less mean the shops can pay back the financiers as well as make more profit. The CC companies win in the case the customer cannot keep up with the payments. The customers that do keep up with payments got to buy a product for less than otherwise.

Seems win-win for almost everybody.

 

[6pack]

^ that would be true if the product actually cost the price mentioned. Everyone knows that mrp listed on most goods are inflated higher than mount Everest now.

What if the manufacturing company factored in the interest rates in the selling price before hand (along with seller or cc company), & then offers the marked up item at 0% emi? So at that price company and banks/dealers both get to earn profits and company gets bragging rights to number of units sold to customers who can't pay in full.
Does it look like a win win situation now?

 

[sharktale1212]

^ I dont think manufacturing companies care about whether to factor in the interest rates. What really happens is the first - mount Everest scenario ..mrp listed is a bomb compared to actual manufacturing + tax paid price. An easy example is say the refined oil costs, a 1 litre pouch costs of Fortune Sunflower is 125/- MRP. Retailers give you a discount anywhere from 20-25/- selling for 99-100ish, even with that price they make a hefty 10-15/- profit.
So I guess the whole 0% interest thing means everyone quotes 125 as a price and says 0% interest + waived off processing fee. If it makes more money than conventional pricing why bother with actual price. And we all wonder why the phones, TVs actually cost over and above the foreign price + customs paid.

 

[ashishsahu]

Really? So Bajaj offers you an EMI at zero percent interest, for a whole year, and you think they don't earn anything? My friend, I've been to plenty of shops. Not just now but Bajaj has been financing for years. Previously they had "processing fees only" which was about interest at around 10-15% for a year, now there is nothing. So did they suddenly turn altruistic? Charitable perhaps?



There are a few more ways it could work, but that's the gist. I prefer things to be clear rather than not. Your opinion could be different. RBI is one of the only institutions left in India that functions properly and has a shred of dignity left. Lets not malign them for things that make the consumer market transparent.




.[DOUBLEPOST=1380310739][/DOUBLEPOST]
They aren't. Thats what im saying! You dont run a business like that. Its only the VC's that take sort of risk. The rest I think use any of the above or some other more brilliant method.

Did i say they turned altruistic? it will be naive to assume any business working under that nature. they bank on the default payment on the part of the customer, earning on penalty fees on these 0 % emi's, again bajaj finserve doesn't runs on "penalties" only if you will quote me again.

And who is maligning RBI? i had written this move is to curb demand of the consumer durables. is that shredding the dignity?