The Reserve Bank of India on Wednesday barred 'zero per cent interest' schemes offered by banks to credit card holders.
Describing the zero per cent interest scheme as a 'pernicious practice' which deters customer protection and accounting integrity, RBI has said that banks should not resort to any practice that would distort the interest rate structure of a product as this 'vitiates transparency in pricing mechanism' and prevents customers from taking informed decisions. Bankers said RBI has indicated that zero interest loans are a violation of its lending norms which prevent loans below a bank's base rate.
Retailers said the directive would deprive aspirational consumers of a facility to acquire goods they cannot otherwise afford and expect that the festival sales might get further depressed this year. Banks said that over Rs 1,000 crore of billings out of the monthly credit card billings of Rs 11,000 crore were coming from purchases billed under EMIs.
"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. RBI had earlier informally asked banks to discontinue such schemes in June this year. However, it decided to issue a complete ban as such lending continued to grow."It is the responsibility of banks, who are using their good offices to get the better bargain, to make customers fully aware of these benefits and also pass on the benefits to them fuly and indiscriminately while sanctioning loan for the purchase," RBI said in a circular to all banks. It added that while transferring the benefit, banks should not tamper with the applicable rate of interest.
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.
Besides zero interest EMIs that are funded by dealer discounts, RBI has also banned schemes where banks on their own offer cardholders the option to break down their large purchases into EMIs for a processing fee. "In the zero percent EMI schemes offered on credit card outstandings, the interest element is often camouflaged and passed on to the customer in the form of processing fee," RBI said.
RBI's circular has also asked banks to terminate relationships with those merchants who charge customers more for facilitating payments by debit card.
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