Banks, consumer finance firms and retail chains are getting ready to evolve alternatives to attract customers during the ensuing festive season

Babu Jayaram and his family have been waiting to replace their nine-year-old television with an LCD TV. They have also set their sights on acquiring an SLR camera.

Their dream to own these high-value products by swiping their credit cards is, however, unlikely to be realised this Diwali with the Reserve Bank of India (RBI) coming down on banks offering zero per cent-interest consumer finance schemes.

“We were banking on such schemes. Though a processing fee was levied, it used to be adjusted against the second instalment. I ended up paying only the cost of the product. But with the ban on zero-interest schemes, it will be some time before we get access to such easy consumer finance,” he said.

The directive has come as a surprise to not just consumers like Mr. Jayaram but to various stakeholders. Banks, consumer finance firms and retail chains have adopted a cautious approach even as they get ready to evolve an alternative to attract customers during the ensuing festive season.

Nearly one-third of total sales are driven by such hassle-free consumer finance schemes, said retailers, who fear the RBI directive will only add to woes related to rising prices. The prices of many consumer durables are likely to be revised next month.

For many households, such finance schemes made sense since they often did not have money for a cash-and-carry deal, said the head of a private sector bank in Tamil Nadu.

Jayaprakash, proprietor of Jayam and Co., said consumers opting for zero interest rate schemes are aware of the processing fee and other charges levied. Now, consumers may go for lesser-known brands to save money, he said. Many may move to schemes offered by financial institutions not affected by the RBI’s directive.

While public sector banks distance themselves saying their banks are no more in the consumer finance business, what they cannot deny is the use of credit cards. At the heart of the zero-interest schemes is the credit card which serves as an important instrument in terms of identification, the credit worthiness of the customer, and down payment.

The problem arises, the banker said, when the zero-interest schemes offered against credit cards are accompanied by higher processing fees. What makes the issue knotty in such schemes is the customer loses out on the discount that he/she would have got if it was an outright purchase.

In some cases, while the consumer is billed for the full amount, the discount is offered to the financiers to take care of the interest ‘loss’. RBI, sources in the banking industry said, seeks to curb such practices and bring in greater transparency for consumers.

Welcoming the move, Nirmala Desikan of Consumers Association of India said the higher interest rate that is expected to be levied following the ban would help reduce consumerism. “This will control the urge to purchase unnecessary products,” she said.

Given the growing aspirations of households, the stakeholders, however, are not expected to remain silent. Arul Daniel Roby, proprietor of Chellamani and Co. retail chain of stores, said a fresh strategy to hard-sell the products would be evolved shortly by the manufacturers, banks and others concerned.

“EMI schemes were an easy payback facility. But with the RBI ruling, we expect the festive season sales to tumble by 10 per cent,” said Univercell founder D. Sathish Babu. This may also affect the launches of new mobile phones lined up for next month.

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