RBI recently took charge to change a few ongoing schemes that it considered was part of malicious design to lure customers into products they did not understand. Coming right before the onset of festive seasons, the industry, quite understandably, made lots of noise. Sure, customers do get lured to schemes that defer payments for sometime in future. The ease of making buying decision does help the industry to pump up demand, especially during festive seasons. RBI, on the other hand, reiterates its commitment towards innocent customers who fall for schemes that look lucrative on the face, but have hidden financial arrangements for self serve. While both parties are right on their part, may be, the solution lies somewhere in the middle.
It started when RBI banned ‘zero percent interest rate’ schemes on the purchase of consumer goods on September 25. Notably, such schemes are quite popular among consumers who are eager to enjoy the product now but are happy to defer payments in future. Companies responded with zero interest schemes where the cost price of the product gets divided equally to be paid, say, in six installments. It was a win-win situation for both consumers and producers because, on one hand, consumers could afford the product and on the other hand, producers could ramp up the notional demand for their products. RBI does not like this because the hidden costs are either not communicated to consumers or are too complicated to be understood by them. For instance, usually such schemes come loaded with processing charge and, at the same time, do not pass on the discount to consumers, which is otherwise available. In reality, consumers are effectively paying substantial interest (sometimes, as high as 20%); contrary to ‘zero interest’ claims made by companies.
Industry experts were quick to argue the rationality of the move by RBI. They seem to have a point when they claimed that such schemes are merely tools to help consumers make decisions faster. Consumers usually take some time before committing to high-ticket products. Industry also claims that consumers are aware of the costs. They get hooked to schemes because they simply do not mind paying slowly. The merit of this argument lies in the fact that such schemes are not new. They have been in the market for a few years now and consumers simply love it.
RBI, meanwhile, also banned 80:20 loan schemes prevalent in real estate. Here again, the industry cried foul on the pretext that such schemes were responsible for seasonal spurt in demand. They also claimed real estate industry that is going through challenging time will lose the opportunity to prop up demand this festive season due to RBI’s policy.
RBI’s move is anything but vindictive. Notably, there are many other schemes in the market that are still operating. With these smart moves, RBI has tried to solve a few problems. Evidently, real estate and consumer goods industries are two very large sectors having significant impact on economy of India. These are interest sensitive industries that run primarily on loans. Recent policy decisions by RBI clearly indicate that fighting inflation will be its main objective. Accordingly, it has clamped down on Zero interest and subvention schemes because they tend to promote inflation in two ways. First, juicy offers rack up the demand encouraging producers from increase prices further. RBI intends to force price correction to promote organic demand, and thus control mainstream inflation. Second, disguised in such schemes are loans, which need to be funded from the economy. This is contradictory to RBI’s current policy of controlling liquidity in the system. By discouraging loan and forcing price correction, RBI intends to control extra liquidity and inflation respectively.
By coming down heavily on industries, RBI is taking proactive actions to control mainstream economy. The message to everyone, including the government, is clear that tangible actions are required to come out of the mess we are into. In this process, growth is sure taking a back seat for the time being. Industry is correct in responding negatively to stringent moves by the RBI. The good thing is that both partiesaresticking to their guns. Now that is good news.
(The write is Director, InvestCare, a leading wealth management firm. He can be reached at samar.vijay@investcare.in)