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Festive damper: RBI bans 0% interest schemes for buying goods

Schemes exploit customers

The very concept of 0% interest is non-existent and fair practice demands that the processing charges and interest charged should be kept uniform, product or segment-wise, irrespective of the sourcing channel, said the RBI
Such schemes only serve the purpose of alluring and exploiting the vulnerable customers, it said
In the zero per cent EMI schemes offered on credit cards, the interest element is often camouflaged and passed on to the customer in the form of processing fee

Mumbai, September 25
The RBI today banned zero per cent interest rate scheme for purchase of consumer goods, a move intended to protect customers but may dampen the festive spirit. The central bank has also said that no additional charges can be levied on payment through debit cards.

"...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," RBI said in a notification.

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

The notification further said that the only factor that can justify differential rate of interest for the same product, tenor being the same, is 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, the RBI notification said: "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 is 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, the 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. PTI

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