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Economy Sep 24, 2013

Want to buy a new phone or TV? Forget that 0% EMI scheme

By Firstbiz Editors

After increasing the interest rates, the Reserve Bank of India is on an all-out effort to create awareness among the common people about the cost of the money they spend.

Towards this end, the RBI has asked banks to stop giving zero percent interest loans to buy consumer goods, a report in the Economic Times said today.

"Such schemes only serve the purpose of (luring) and exploiting vulnerable customers," the report quoted from a confidential note sent to banks by the central bank on 17 September.

Some of the banks have already stopped giving such loans, says the report.

Reuters

Forget that smartphone. Reuters

Companies nowadays offer everything-from home appliances to LCD TVs to smartphones-under such schemes. It also help them shore up their sales. There is a flood of such schemes during the festival season.

Consumers too make a beeline for these schemes under the impression that they really getting a good bargain. However, there has been criticism that consumers opting for these actually lose out instead of benefiting.

It is significant that the RBI's move comes just ahead of the festival season. Consumer durable companies have been gearing up to beat the slowdown in demand during the forthcoming festival season.

The RBI's move just nipped their plans.

"The way forward for the measures suggested by RBI is justified, but the notice given is so short ahead of the festive season and in the middle of a dull economy, that sales are likely to take an instant blow," Himanshu Chakrawarti, CEO of The Mobile Store, has been quoted as saying in the ET report.

Such schemes have been driving sales of smartphones such as Apple's 4s in the country.

According to the report, the RBI has said that such schemes make a fool of the consumers they come with a processing fee which nullifies the zero percent interest benefit.

The RBI move will definitely help create awareness among consumers about the hidden costs in such schemes. Surprisingly, the central bank is yet to post this notification on its website.

The move should also be seen in the backdrop of the RBI's battle against the spiralling inflation in the economy. The RBI had last week increased its policy rate by 25 bps and also cut short term rate by 75 basis points.

At a time when interest rates are at elevated levels in the economy, such zero interest loans send out wrong signals to the consumer. The RBI's move should be seen as an attempt to rectify this anomaly.

by Firstbiz Editors

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