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In an effort to come down on unhealthy practice in retail loans, the Reserve Bank of India has asked banks to refrain from offering 0% Equated Monthly Installment (EMI) schemes on consumer products bought through credit cards. This move comes ahead of the festival season, a time at which manufacturers see their highest volumes of sales.
Ban to hurt mobile sales, especially of high-end phones
This ban is bound to hurt the mobile phone sales in India because many consumers buy expensive smartphones using these schemes. Shoppers are comfortable with paying for products in installments as opposed to large, one time payments. Currently, companies like Apple, Samsung, Nokia and others offer such schemes on select credit cards.
Why 0 % schemes are vital for sales
Customers have an option of paying for the products over long periods of time through installments. You can choose to pay for the phone over 3 months to a year. Another important aspect is that consumer don't have to pay a down payment while purchasing these products. Owing to all these benefits, manufacturers have been able to sell their high-end phones with ease through 0 % EMI schemes. The EMI plans allow customers to overlook the high costs of premium handsets and splurge immediately.
The truth behind 0 % schemes
The government wants consumer to understand that in the 0 % EMI schemes offered on credit card purchases, the interest element is often camouflaged and passed on to the customer in the form of a processing fee.
How will things change after the ban comes into place?
There will be uniform processing charges and interest rates, product and segment-wise regardless of sourcing channel.
How it will benefit the consumer
Also, the move is good for the economy, since the government wants the consumer to avoid stacking up debts. Instead, it wants to bring back the good old habit of saving up for expensive things. The move makes sense since zero percent EMI schemes cause people tp spend money that they don't have.