The Reserve Bank of India has taken the high moral ground in directing commercial banks to desist from certain “pernicious practices,” which, in its view, “deter consumer protection and accounting integrity.” At the core of its directives is the fairly widespread practice of certain banks which offer retail loans at “zero per cent” interest to purchase high value consumer durables such as LCD TV sets, smart phones, high-end refrigerators and the like. Arguing that there is no such thing as an interest free loan, the RBI has laid down guidelines that will make a large swathe of retail lending by banks more transparent. Lending banks should use their clout with the dealers of consumer durables to get the best possible bargains and, equally importantly, pass on those benefits to their borrowers in a transparent manner. There are special reasons why such seemingly pedestrian advice is warranted. Subvention, a kind of subsidy that manufacturers offer, as well as a moratorium on payment, are fairly common practices to boost sales. There has been a disquieting tendency among banks of not giving their customers information on the full extent of these concessions. Even more unacceptable has been the practice of part-loading these to the interest rate charged to make the latter appear lower. Banks have now been asked to pass on the benefits to their consumers “fully and indiscriminately” without camouflaging them in the form of lower interest rates. Thus a discount on the price should automatically mean a lower quantum of loan. Repayment of the loan should commence only after the moratorium period.
Equally undesirable are the related practices of zero percent EMI schemes on outstanding credit card balances. Here again, zero interest is a misnomer as borrowers are charged a processing fee. Canons of transparency require all such fees — processing as well as others — to be uniform across all products and segments. Finally, no fee should be charged on debit card transactions. The RBI guidelines are welcome and, in many cases especially relating to credit card usage, overdue. Transparency in lending is a welcome trait and the authorities should encourage banks to move towards complete disclosure. The directive could, however, deal a deadly blow to consumer durable sales, which generally peak during the festival season, just round the corner. Yet, from an overall perspective, consumer protection is probably more important than a short-term dip in sales of consumer durables, which will rebound over time anyway. By seeking to make expensive products affordable to even those who cannot really afford it, the “zero-interest” schemes, which were not really that, were drawing consumers into a debt-trap. It is just as well that the RBI stepped in.