RBI cracks the whip on retail finance schemes-Business Standard
Zero % EMI scheme banned; No fee on debit card transactions; Banks told to pass on discounts to customers
Coming down hard on financing schemes that short-change customers, the Reserve Bank of India (RBI) on Wednesday said banks must pass on benefits like discounts to consumers who take loans to buy products.
RBI also asked banks to offer uniform interest rates and processing fees on equated monthly instalment (EMI) credit card schemes for retail products, discouraging them from offering such products with zero per cent interest.
The central bank said the interest rate charged was “camouflaged” and passed on to customers as processing fee by banks offering zero-per-cent EMI schemes on credit card outstanding for purchasing retail products. “Since the very concept of zero per cent interest is non-existent and fair practice demands that the processing charge be kept uniform product/segment-wise, irrespective of the sourcing channel, such schemes only serve the purpose of alluring and exploiting the vulnerable customers,” RBI said.
Besides, banks have been asked to severe relations with merchants that charge fees for use of debit cards for payments.
Manufacturing companies and dealers offer sops like subventions, discounts on price, and moratorium for payment to customers while they make the purchase by availing of loans from banks. In such instances, banks must make customers aware of these benefits. They must also pass on the benefits to customers fully while sanctioning loans for purchases.
This has to be done directly without tampering with the applicable rate of interest of a product. If there is a discount offered in the price of a product, the loan amount sanctioned should be after taking the discount into account.
Also, if there is a moratorium on payment, this benefit must be passed on to the customer. The repayment schedule must begin only after the moratorium period, RBI said in a communication to bank chiefs.
Some banks were loading the expenses incurred in sourcing the loan (like commissions to sales agents) in the applicable return on investment charged on the product.
RBI added some merchants were charging fees for using debit cards to make payments for buying products and services. Such fees were not justifiable and were not permissible under bilateral agreements between acquiring banks and merchants. Banks must terminate their relationships with such establishments (those charging fees).
That a large number of consumers had been taking advantage of the zero-per-cent scheme is evident from the fact that average monthly spend per credit card has jumped 42 per cent to Rs 6,322 from Rs 4,462 two years ago.
According to industry, the move would hit sales of consumer products in the run-up to the crucial October-November festive season. EMI schemes are used in 20-30 per cent of consumer durables sales.
Chief executive of a retail chain said RBI should have given retailers two to three months’ time to implement the rule.
“We are going to peak festive season and such schemes are an important way to generate sales,” he said.
Unhappy over the move, bankers called this micro-management by the central bank. On the norms on price discount/moratorium, they said dealers or manufacturers often agreed to share customers’ interest burden to drive product sales. For instance, car dealers often advertise, if customers buy vehicles from their showrooms, they could avail of financing at seven-eight per cent — not only below the current auto loan rates but also lower than banks’ existing base rates or minimum lending rates. According to bankers, in such instances, manufacturers or dealers share the interest burden of customers. So, if a bank’s car loan rate is 12 per cent, and the customer is offered loan at eight per cent, the remaining four per cent is either shared by the dealer or the manufacturer or jointly by them.
“In my personal opinion, this (RBI’s direction) does not make any sense. Today, customers are well aware of pricing, the terms & conditions of loan offers and the EMI and repayment tenures. To me, it is micro management by RBI and it is bizarre for a central bank to get involved in such things,” said an official of a foreign bank.
On the ban on zero-per-cent loans, bankers said customers were informed about the processing fees and charges before they availed of zero-per-cent loan offers. Restricting the usage of such offers in product marketing would affect the demand during festive season. Banks had no choice but to come up with other ways of marketing, such as ‘lowest EMI offer’, to drive festive season demand, said a banker.
On the transaction fees charged on debit card transactions, bankers explained, when a bank set up a point-of-sale terminal at a merchant outlet, it entered into an agreement where a merchant had to pay one or two per cent of his revenue to the bank as fees. However, the agreements generally did not prevent merchants from recovering money from customers.
“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.
“A lot of retail buying happens on impulse and these schemes (zero-per-cent loan offers) facilitate such transactions I believe, the central bank is sending a signal that we should consume so-called non-essentials less, especially the imported ones. Probably, this is a way to correct the country’s finances. But in doing that through (restrictions on purchase of) mobile phones and television sets, to my mind, they are taking it a bit too far,” a private-sector banker said.
RBI also asked banks to offer uniform interest rates and processing fees on equated monthly instalment (EMI) credit card schemes for retail products, discouraging them from offering such products with zero per cent interest.
The central bank said the interest rate charged was “camouflaged” and passed on to customers as processing fee by banks offering zero-per-cent EMI schemes on credit card outstanding for purchasing retail products. “Since the very concept of zero per cent interest is non-existent and fair practice demands that the processing charge be kept uniform product/segment-wise, irrespective of the sourcing channel, such schemes only serve the purpose of alluring and exploiting the vulnerable customers,” RBI said.
Besides, banks have been asked to severe relations with merchants that charge fees for use of debit cards for payments.
Manufacturing companies and dealers offer sops like subventions, discounts on price, and moratorium for payment to customers while they make the purchase by availing of loans from banks. In such instances, banks must make customers aware of these benefits. They must also pass on the benefits to customers fully while sanctioning loans for purchases.
This has to be done directly without tampering with the applicable rate of interest of a product. If there is a discount offered in the price of a product, the loan amount sanctioned should be after taking the discount into account.
Also, if there is a moratorium on payment, this benefit must be passed on to the customer. The repayment schedule must begin only after the moratorium period, RBI said in a communication to bank chiefs.
Some banks were loading the expenses incurred in sourcing the loan (like commissions to sales agents) in the applicable return on investment charged on the product.
RBI added some merchants were charging fees for using debit cards to make payments for buying products and services. Such fees were not justifiable and were not permissible under bilateral agreements between acquiring banks and merchants. Banks must terminate their relationships with such establishments (those charging fees).
That a large number of consumers had been taking advantage of the zero-per-cent scheme is evident from the fact that average monthly spend per credit card has jumped 42 per cent to Rs 6,322 from Rs 4,462 two years ago.
According to industry, the move would hit sales of consumer products in the run-up to the crucial October-November festive season. EMI schemes are used in 20-30 per cent of consumer durables sales.
Chief executive of a retail chain said RBI should have given retailers two to three months’ time to implement the rule.
“We are going to peak festive season and such schemes are an important way to generate sales,” he said.
Unhappy over the move, bankers called this micro-management by the central bank. On the norms on price discount/moratorium, they said dealers or manufacturers often agreed to share customers’ interest burden to drive product sales. For instance, car dealers often advertise, if customers buy vehicles from their showrooms, they could avail of financing at seven-eight per cent — not only below the current auto loan rates but also lower than banks’ existing base rates or minimum lending rates. According to bankers, in such instances, manufacturers or dealers share the interest burden of customers. So, if a bank’s car loan rate is 12 per cent, and the customer is offered loan at eight per cent, the remaining four per cent is either shared by the dealer or the manufacturer or jointly by them.
“In my personal opinion, this (RBI’s direction) does not make any sense. Today, customers are well aware of pricing, the terms & conditions of loan offers and the EMI and repayment tenures. To me, it is micro management by RBI and it is bizarre for a central bank to get involved in such things,” said an official of a foreign bank.
On the ban on zero-per-cent loans, bankers said customers were informed about the processing fees and charges before they availed of zero-per-cent loan offers. Restricting the usage of such offers in product marketing would affect the demand during festive season. Banks had no choice but to come up with other ways of marketing, such as ‘lowest EMI offer’, to drive festive season demand, said a banker.
On the transaction fees charged on debit card transactions, bankers explained, when a bank set up a point-of-sale terminal at a merchant outlet, it entered into an agreement where a merchant had to pay one or two per cent of his revenue to the bank as fees. However, the agreements generally did not prevent merchants from recovering money from customers.
“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.
“A lot of retail buying happens on impulse and these schemes (zero-per-cent loan offers) facilitate such transactions I believe, the central bank is sending a signal that we should consume so-called non-essentials less, especially the imported ones. Probably, this is a way to correct the country’s finances. But in doing that through (restrictions on purchase of) mobile phones and television sets, to my mind, they are taking it a bit too far,” a private-sector banker said.
Deposit rates unlikely to move further from current levels
A private sector bank hiked their one year deposit rate to 10%, but this is unlikely to be an indicator
Banks are not planning a significant hike in deposit rates as there are anticipation of improved liquidity due to NRI flows. Recently, a private sector bank hiked their one year deposit rate to 10%, but this may not be an indicator of deposit rates touching double digit.
Bankers said the wide gap in deposit growth and credit offtake, persistent for many months, may narrow in the second half of current financial year. They see see improvement in pace of resource mobilization on three counts including NRIs flows from October. This would temper the need to raise deposit rates on term deposits for retail side. Last major revision in term deposits rates was done by State Bank of India.It raised rate by 100 basis points for deposits upto less than one year and 25 basis points for those one year and above.
According to bankers the flow of NRI deposits, especially Foreign Currency Non-Resident (Banks) deposits, will see higher inflows on the back of currency hedge facility provided by banks. Besides that the decline in the gold imports due to severe curbs will mean the money which otherwise would have gone into buying yellow metal will flow into banks. And finally, the better harvest on good monsoon across country would bring more money into hands of rural households.
Senior IDBI Bank executive said with many banks raising term deposit rates in August and September, the differences amongst them have narrowed down. This trend would not change much unless some bank decides to turn aggressive. The funds would come but at a cost, that is hit on interest margins as lending rates are unlikely to inch up. Similarly a senior official of Corporation Bank do not expect more than 25 basis points upside movement in deposit rates from current levels. “There may be only marginal rise in deposit rates. At the most it will be 25 basis points for the rest of this fiscal,” said the official.
Earlier this week Lakshmi Vilas Bank raised interest rates on one-year deposits by 50 basis points to 10%, while for deposits above one year but less than two years the interest rate has been revised to 9.50% from 9.25%. The bank has also raised rates on deposits for more than two years and up to five years by 25 basis points. “We increased the rates for our asset liability management adjustments. We want to reduce our dependence on short-term deposits and bring more stability in Net Interest Income,” said J Moses Harding, executive director and chief business officer, Lakshmi Vilas Bank. It was in the first quarter of 2012-13 that private banks were offering 8-10% rate on deposits with 1-3 maturity.
According to Reserve Bank of India data the credit grew by 18.1% for 12 months ended September 6, 2013 (16.6% a year ago), the deposits rose by 13.4% during same period ended September 6, 2013 (14.5% a year ago).
Banks will continue to mobilise more deposits from rural pockets. “Compared to urban areas, rural pockets have limited investment alternatives. The penetration of mutual funds and stock investments is not deep. So the more money would get parked into deposits compared to second half of 2012-13, though albeit banks will compete for that pie, said Vibha Batra, senior vice president with rating agency ICRA said.
In the mid-quarter review of the monetary policy RBI riased the repo rate by 25 basis points to 7.50%. But at the same time the Marginal Standing Facility (MSF) rate which is currently the operative rate was reduced by 75 basis points to 9.5%.
RBI has done a good thing on retail loan schemes. Most of the people who use credit cards are in favor of using it because they get some financial benefits of shopping from it. Thank you Danendra for the information.
ReplyDeleteRegards,
Apoorva
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