RBI bans zero pc EMI option on goods buying through credit cards

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SME Times News Bureau | 26 Sep, 2013
To protect customer interest, the Reserve Bank of India Wednesday asked banks to stop the zero per cent interest rate scheme for purchase of consumer goods and said that no additional charges can be levied on payment through debit cards.

In a notification, the central bank said banks should not resort to any practice that would distort the interest rate structure of a product as this "vitiates the transparency in pricing mechanism which is very important for the customer to take informed decision."

The RBI said the very concept of zero per cent interest was non-existent and fair practice demanded that the processing charge and interest charged should be kept uniform product wise or segment wise, irrespective of the sourcing channel, since such schemes only serve the purpose of alluring and exploiting the vulnerable customers.

In 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.

"Similarly, some banks were loading the expenses incurred in sourcing the loan (viz DSA commission) in the applicable rate of interest charged on the product," said the bank.

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

With regard to subvention, it said 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.

Similarly, "If there is a moratorium period for payment available, the benefit should be passed on to the customer by ensuring that repayment schedule, including the interest servicing, commence after the moratorium period only rather than adjusting it in the interest."

Thus in principle, banks should not resort to any practice that would distort the interest rate structure of a product as this vitiates the transparency in pricing mechanism which is very important for the customer to take informed decision, it said.

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 availing loans from banks.

In such instances, it was the responsibility of the banks, who are using their good offices to get the better bargain, 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, it said.

On levying additional fees on debit card transactions, RBI said there are instances where points of sales 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.

"Such fee 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."

"These practices or products thwart the very principle of fair and transparent pricing of products which behold customer rights and customer protection, especially, in the more vulnerable retail segment," it said.

Such practices violate, both in letter and spirit, various provisions of master circular on interest rate on advances "and therefore, you (banks) are advised to strictly desist from these practices hence forth," it added.