The 0% EMI scheme is seen as a great advantage by most of the consumers. This method of payment consists of a shorter term and no hidden costs. The lender receives more than the regular interest rate and the cost of credit is relatively high. To protect the customers from falling into debt traps and maintaining financial stability in the country, RBI had banned the EMI scheme. This scheme ensures heightened transparency in the financial system and the pricing mechanism.
When 0% EMI scheme was introduced, there was a growth in the spending habits of consumers because a number of people could acquire things that they didn't have the money for. The spending habits of people were becoming unhealthy and affected the aggregate savings in the country. Banks, businesses and merchants made lots of money. It was a time of great affluence of credit. Then RBI banned the 0% EMI schemes even though the consumers were pinned to the idea of flexible payment options and easy credit.
After the 0% EMI scheme was banned, the banks began tying up with enterprises that provide high-value services which increase the credit-card business. EMI schemes which have cash-back were on the rise, a replacement that the young consumers found very beneficial. EMI at Point of Sale (PoS) is a trend that doesn't seem to be going away anytime soon. It enables consumers to generate high-value goods or services without paying the entire amount at the time of purchase. These days, even educational institutes accept credit card payments. Insurance, hotels and the education sector have been quick to adopt this means of payment.
This trend has shifted the consumption pattern of people. Under 0% EMI schemes, the consumers in the country had started consuming without any consequences and affected the balance of savings in the country. After the 0% EMI trend was banned, the banks have also become more cautious about providing credit to their customers. These days, rigorous checks on credit history are done before handing people with credit. The stringent checks done by the banks has also reduced the number of defaulters. It was an essential step since more and more people have started opting for EMI facility on their purchases.
Factors Leading to RBI Ban on 0% EMI Scheme
The factors discussed below contributed to the decision of RBI in banning the 0% interest rate on EMI scheme
Hidden Interest Rates
The scheme claims that 0% interest rate is charged on the EMI but other charges such as the processing fees make up for the component and the customer ends up paying an additional amount as compared to a non-zero interest rate on EMI. This shows that the scheme is a farse and the banks are making false claims that marginally make a difference to the total sum dispersed towards the repayment. Most of the banks, as directed by RBI are not allowed to provide loans below the base rate.
Creation of Artificial Demand
The demand created in such a manner is inflated and artificial. Sales go up and the demand increases since the people have more access to credit and not because their purchasing power has increased. The result of this could be a low growth rate and a higher level of inflation. After the 0% EMI schemes have been banned, the sale of high-end durables has gone down.
The price of products also varies based on the mode of payment chosen. Usually, when customers are paying by cash or through debit card, they can avail high discounts but these benefits are generally not offered when someone makes the payment through credit card in the form of EMIs. Under the 0% EMI scheme, the problem of price disparity intensifies.
EMI is a boon for people who wish to own durable commodities like home, education etc but when used for buying luxury products with high depreciation, they can impact the credit score of an individual adversely. When consumers are provided EMI with a 0% interest rate, the customers get excited without looking into the consequences and terms. RBI's decision on banning the 0% EMI scheme will boost the economy's growth and also generate a healthy consumption habit amongst the consumers.