RBI blocks “interest free” plans


September 27, 2013

Nupur Acharya, The Wall Street Journal

Mumbai, September 27, 2013

On the back of a surprise increase in a key interest rate last week, India’s central bank dealt another blow to banks this week by asking them to stop encouraging credit-card use with misleading “zero interest” payment plans.

While credit card issuers have been working with retailers to offer special no interest offers for years, the Reserve Bank of India said the plans were misleading as they often have hidden costs.

The banning of this standard promotion could prove to be a dampener for banks and consumer product manufacturers ahead of the festival season that begins in less than ten days.

Zero interest payment plans have become popular in the last couple of years with most big electronics and consumer durable stores offering them. The trend spread when smart phone and tablet manufacturers introduced them to push up the sale of their expensive devices.

While the drawn out payment plans for the purchases had no interest, they often included a processing fee. Meanwhile consumers that bought the products using the plans sometimes had to pay a higher price than those that paid in cash.

The RBI felt that the plans were just camouflaging the interest and passing it on to consumers as a fee or higher price. It said that any discount on prices should be passed on to all customers.

“The very concept of zero percent interest is non-existent and fair practice demands that the processing charge and rate of interest charged should be kept uniform,” The central bank said in its notification. “Such schemes only serve the purpose of alluring and exploiting the vulnerable customers.”

The end of the plans won’t affect most people, some industry analysts said, as the value-for-money conscious Indian consumer has always been aware of the other costs of the interest free plans.

“Consumer sentiment is fairly cautious on spending, especially high-price consumer durables, given the general economic scenario,” said Devangshu Dutta, chief executive officer with Delhi-based Third Eyesight, a retail and consumer durable consulting firm.

(This piece appeared in the Wall Street Journal blog titled "India Realtime".)