)
Take Rajesh Nair (name changed on request), for example, who finds it hard to believe he paid any interest while purchasing the latest air-conditioner (A/C). "I did the math. The price of the A/C divided by the number of instalments was exactly the same as the quoted price on the counter," he says.
So, he ended up buying the A/C at a zero-interest-rate scheme through his credit card. His monthly instalment: Rs 4,166 for 12 months. Dig more and Nair would admit paying just Rs 1,000 as processing fee. "But for something that costs Rs 50,000, paying just Rs 1,000 isn't too much," he argues.
He ends up with the additional cost for two reasons. One, most likely, he does not have the wherewithal to pay for the A/C completely and Rs 4,166 is lighter on his pocket. Two, he believes he is buying something without any interest cost. Yet, for all he knows, he would have bought it at a good Rs 5,000 less if he had paid in cash.
As a banker says, on condition of anonymity: "Since banks cannot give loans below the base rate, technically a zero per cent loan or equated monthly instalment (EMI) scheme is not possible."
Obviously, such schemes are "teasing" customers, something the Reserve Bank of India (RBI) does not approve. Its latest directive is important as it forces banks to stop teasing by zero interest schemes, a popular one in the festival season. Given their complexity, most experts recommend finding discounts or haggling with the dealer. Adil Shetty, chief executive officer (CEO), Bankbazaar.com's advice for such deals is: "Find out if you are eligible for any discount if you pay the full amount and if there are any transaction charges for the finance scheme. It is best to stay away from such finance schemes, unless you are very sure of all the conditions surrounding the purchase."
Buyers need not negotiate with the dealer any more. RBI has decided the buyer needs to know the A/C is available for Rs 45,000. And, that he needs to be told Rs 5,000 (plus any administrative and processing fee) is the cost of financing it.
Nor will banks be allowed to package hidden costs or discounts with interest rates. So, a rate of interest in car loans and personal loans in which dealers' or direct selling agents' benefits are packaged will not be allowed. Instead, the buyer will need to be told the actual rate of interest the bank is charging, the discount he can get from the dealer and so on.
This will especially help in reducing the principal in the case of car loans. For example, assume a bank was offering the dealer finance for a five-year loan of Rs 4 lakh at 11 per cent and the dealer benefit was five per cent. If the dealer passes on three per cent of the benefit (Rs 12,000) to you, the principal did not come down to that effect. So, you started paying the loan with the initial principal of Rs 4 lakh. In the new regime, the cash benefit will be subtracted from the loan amount, so the new principal will be Rs 3.88 lakh from the beginning of the loan tenure. This would be especially useful if you wish to prepay the loan amount.
Says Harsh Roongta, CEO, Apnapaisa.com, "RBI's instructions to have transparency in this market is many years old but these were not enforced. The current circular is more detailed and a stricter tone indicates RBI's intent to enforce. If it does, then apart from the regular white goods/brown goods, the car loan market will be shaken up, as it has large DSA (direct sales agent) commissions which are used to distort the interest rates against the less savvy consumers (unfortunately the majority)."
Next time a merchant establishment charges for a transaction on a debit card, you should tell him that you will inform the bank concerned. Usually merchant establishments charge two per cent on debit card transactions, saying it is a transaction fee. "Such fees are not justifiable and are not permissible as per the bilateral agreement between the acquiring bank and the merchants and, therefore, calls for termination of the relationship of the bank with such establishments," the RBI circular says.
Bankers said they will have to come up with some other way of marketing, say lowest EMI offer, to drive festive season demand. They also cite difficulties in implementing such guidelines. "It will be very difficult to implement the guidelines. The bilateral agreements between banks and merchants do not prevent merchants from recovering the fees (they pay to banks) from customers. So, how will the contracts be terminated? Also, at the operational level, it may be difficult to monitor whether merchants are charging or not," said a senior executive of a private bank.
RBI has been generally uncomfortable with teaser products. RBI Deputy Governor K C Chakrabarty, whose current portfolio includes department of banking supervision and customer service, had red- flagged teaser products way back in February 2010 with: "Don't just tease new customers, also tease old customers by charging a uniform rate for both." The comment was in response to teaser loan products launched by the country's largest bank, State Bank of India. Many other banks and housing finance companies had been forced to introduce similar products to protect their market share. The apex bank's latest salvo seems to be in line with this.
Transparency for banking sector as well
Ashvin Parekh
Managing Partner, APAS
RBI's decision on zero interest in EMI for the purchase of consumer durables and other products is an interesting one. It has a strong reason to do this. But some believe the transparency sought is much higher than necessary. There are also suggestions that this would lead to slowing the demand for consumer products.
There is another segment which demands the regulatory intervention associated with this transparency. If the end-user of the consumer product is to be charged with the interest cost, he must be told what he is paying for the credit in-built in the product pricing.
If there is no interest cost to the end customer, then one needs to evaluate why banking companies would get involved with the transaction. If the trade is paying the interest burden, then both the banks and the trade should approach the market and disclose it clearly. I would, therefore, reiterate the need for the transparency not only from the customer's point of view but for the banking sector as well.
Extend benefits to home loans
Harsh Roongta
CEO, Apnapaisa.com
RBI's instructions to have transparency in this market are many years old but were not enforced. The current circular is more detailed and has a stricter tone. It has bravely taken on the mantle of protecting consumers from their own irrational behaviour by enforcing transparency. RBI's premise that a consumer should not suffer just because he is not financially savvy is to be welcomed.
This step will appear more credible if they take this crusade for transparency to several other fronts, more particularly home loans where, even after the so-called transparent "base rate" mechanism , consumers who took the loan in 2010 are paying 1 - 1.50 per cent more than new consumers.
Mandating a no-prepayment charge regime that provides a costless exit from home loans benefits only the savvy and aware consumers. The Reserve Bank must follow through on its premise in the recent instructions that "ROI charged should be kept uniform product/ segment wise or the purchase". If strictly implemented, it will benefit home loan consumers who have larger amounts at stake.
RBI BATS FOR CUSTOMERS
* Teaser home loan rates (fixed-cum-floating) abolished
* Pre-payment penalty on floating, fixed rate home loans abolished
* Differential between bulk and retail deposits lowered; bulk deposits limit hiked to Rs 1 crore
* NEFT and RTGS rates standardised
* Banks asked to follow up on unclaimed deposits
* Some recommendations of the Damodaran panel report on customer service implemented
* Merchant discount rate for transactions with debit card capped at 0.5 to 1 per cent
* Banks allowed to accept Aadhaar cards for KYC norms
* Zero interest loan/EMI on credit card schemes stopped
