Thursday, 26 September 2013

RBI's bizarre take on the 0% EMI offer. Are we ready to be Americanized?

In simplest terms, it is ridiculous for a central bank to get into such micromanagement on offers and schemes of the bank, which are widely expected as well as accepted by consumers. Perhaps, our new Governor has returned to India after a long time and wants to implement the American system in India where pricing indeed is net of all the all possible discounts for upfront cash payments for purchases. In India, however, these steps hold no significance, except that they can spoil the festive mood.

Lets take a simple example of a Croma or a Flipkart. We all buy products from these websites and they offer an EMI option. The price to buy using cash on delivery or using your card or using the EMI option is the same. For periods where the pricing is higher, the payment gateway shows the additional cost involved using the EMI option. There is a clear distinction between the cost of the product and the cost of financing the purchase. When the distinction is so clear and evident, how does the RBI claim that the customer is being deceived?

Lets take an example. Assume that you want to buy a Google Nexus 4 on Flipkart.

This clearly indicates that
  • If you want to buy the phone by making a one time payment by card or cash, you pay Rs 26090
  • If you want to pay it by 3 EMIs, you pay an additional Rs 100 (26190 - 26090)
  • If you want to pay it by 6 EMIs, you pay an additional Rs 300 (26390 - 26090)
  • If you want to pay it by 9 EMIs, you pay an additional Rs 1200 (27290 - 26090)

We do not need brains to understand this. We just need eyes.

Is 0% EMI really a 0% EMI? Yes, it is, in most cases. To give an example, I purchased an iPad Mini last year. The cost of the device was Rs 21,900. I inquired at Reliance Digital, Croma, iStore and a couple of other outlets. I also checked several websites where I saw the same pricing. Now, when I went to buy at Croma, I was told that the processing fee for a 6 month EMI is Rs 300. However, this fee will be refunded to me after I pay those EMIs. Very technically speaking, may be, I would lose some Rs 15 as the opportunity cost (lost interest for 6 months). It is as good as zero.

But, like RBI, I wanted it to be ZERO ONLY. I walked in to Reliance Digital, where I was told, if I buy within a particular date, they have an offer going on, they will waive off the processing fee. I purchased the product right there and opted for the 6 month EMI option. Thus, it is clear that neither the retailer nor the banker are trying to cheat. Reliance knows that, if they give a really 0% EMI, they can get some customers to buy their products, who would have otherwise bought it at Croma. Croma, on knowing this, will ensure they have a similar offer in place soon. It indeed happened in the next 1 week.

Had I paid them in cash or through a one time payment in card, I would have been paying Rs 21,900 only. Now that I went in for an EMI, I paid Rs 3650 a month. Thus, very technically speaking, I saved some Rs 450 (the earning that I could possibly have by investing Rs 21900 in a FD, withdraw Rs 3650 every month and pay the EMI).

So, is it a 0% EMI? I would rather say, it is even better. A screenshot of my EMIs right here prove it.

What the RBI Governor has forgotten is the fact that he is not in America or Europe anymore. He is in India. India is still a nation where the bankers are fighting to increase the usage of cards. The whole effort that we did in the past several years to discourage cash transactions and encourage electronic transactions would be put to the bin with such steps. It would now be more attractive for someone to buy using cash at a retail store than buying it on EMI.

The RBI must understand the fact that we are in a market economy. There are competitors for every product and service, thus the pricing elasticity is not high. While there is a bank which has a strong customer base and wants to get some interest income by letting the customer purchase on EMI with interest, there is another bank which wants to grow its customer base and thus offers EMI without interest. Thus, the former is also forced to offer EMI without interest to remain competitive in the market.

Indian consumers are not only smart but also demanding. It would be foolish to think of them as fools. Before buying a product, a person goes to all shops or websites possible to find the cheapest possible price to buy. He goes for only such purchase. The RBI's job is not to get into shops, at least.

One must understand the basic fact that NO SELLER WILL SELL AT A LOSS. You can bar anyone from selling with or without certain clauses. However, he will still ensure that he will keep his margins in tact. If you do not give him any scope to keep his margins, he will increase the selling price itself. And thus, the customer will end up paying more.

The steps that the RBI is taking in respect of the EMIs could be required, may be, 100 years down the line. As of now, all the RBI has done is spoil the festive mood. In an already hurt economy, RBI could have just been successful in help it bleed even more. RBI is a macroeconomic regulator trying to micromanage things. It would be in the best of everyone's interest to do their own job perfectly.

Now, it would be interesting to see how the banks and retailers structure their product offers now. They will drill into some loophole for sure.

1 comment:

  1. the timing is an excellent one, with economy is also tightening..... but somewhere inside i feel he is doing the right thing, tomorrow i am attending the swadeshi jagaran Manch conference in all probability.