Only few weeks ago RBI had come down heavily on home loan products popularly sold as 20:80 and 25:75 schemes. Now, it's a turn of consumer loans. Recently, in a confidential note sent to banks, RBI has asked them to stop offering zero interest loans.

Why has RBI done so?
It has been a growing trend to purchase consumer durable goods using credit. Many of you must have come across attractive ads inviting you to buy smartphones, SUVs and newly launched LED models among others. Usually, manufacturers of white goods, big retail chains and some prominent retailers tie up with banks and offer you an option to pay for your purchases through EMIs attracting zero percent interest. These loans are a variation in personal loans. The only difference is, instead of disbursing loans to you, vendors are paid directly. Between July 2012 and July 2013, loans disbursed by banks for the purchase of consumer durables have gone up nearly 34%.

RBI is of the view that, although such consumer loans might come at zero percent interest, banks often charge processing fees (which are charged upfront) on such products. This effectively covers for the interest forgone. Hence, these loans trick the borrower and the only purpose they serve is to lure buyers to make purchases. Moreover, in most cases, buyers can't avail any discount otherwise available on cash purchases and loans are issued at the maximum retail price. RBI has also asked banks to stop making such discrimination while issuing loans and has insisted that any benefit that is available should be passed onto customers.

What will change now?
For retailers, it means a loss of business. Since consumer durables are high-ticket goods, they are often bought on credit. Zero interest loan schemes have been contributing significantly to the revenues of consumer durable companies. This move of RBI comes as a double blow to manufacturers of consumer durables. Last week, at the second quarter mid-review of monetary policy, RBI hiked repo rates by 25bps or 0.25%. This would translate in more expensive loans. Expensive loans may further discourage buyers.

PersonalFN believes that RBI has taken a right decision whereby it has asked banks to stop offering loans on zero percent interest rate. As rightly pointed out by RBI, these schemes only serve the purpose of luring people to buy goods. You should be wary of catches these schemes have. This move would bring in more transparency and discourage banks and consumer durable companies from misleading potential buyers.

PersonalFN is of the view that one shouldn't take impulsive buying decisions especially where the ticket size is high. Buying luxury goods only because they are available at zero interest EMIs, would negatively affect your finances owing to hidden costs attached to these products. Moreover, paying EMIs may eat into your financial resources which could have otherwise been utilised towards building a kitty for your retirement. PersonalFN believes rather than buying luxury goods on credit you would be better off delaying your indulgence till you build adequate corpus through your investments to pay for such purchases. Personalised financial plans helps you prioritise your goals and intelligent asset allocation makes the optimum use of available financial resources for fulfilling your goals.

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