In the RBI books, the concept of zero percent interest or no-cost EMIs does not exist.
Let me share a short story on the value of Zero which I picked from Brainly, the knowledge-sharing community portal where 350 million students and experts put their heads together to crack their toughest homework questions.
One day, a famous mathematician convened a meeting of numbers. All the numbers, except Zero, came for the meeting. Zero had gone into hiding. The mathematician ordered the other numbers: “Wherever Zero is, I want you to go and find him out and bring him to this meeting immediately.” All the numbers began to look for Zero. At last, after a long search, they found him hiding himself behind a tree. The numbers caught hold of him and presented him before the mathematician.
The mathematician said: “Why were you hiding? Why were you afraid to attend the meeting of numbers?”
Zero started crying and said: “Sir, I am Zero. According to people, I have no value and so no one cares about me, no one respects me. This hurts me a lot. That is the reason why I was not inclined to attend this meeting.”
The mathematician thought for a while and called the number One (1) and asked him to stand in front of him. Looking at Zero, the mathematician asked him: “Tell me, Zero, what is the value of this number?”
“One,” replied Zero.
The mathematician then asked Zero to stand to the right of One. Looking at the other numbers, he asked them, “What is the value of this number?”
“Ten,” replied all the numbers in unison.
The mathematician then asked all the Zeros to stand to the right of One, one after the other. Every time a Zero was added to the right of One, the mathematician would ask the other numbers the value of One. As the number of Zeros increased, the value of One also increased, that is to a hundred, a thousand, ten thousand, a lakh and so on.
The mathematician said to the zeroes: “When each of you stood to the right of One, one after the other, the value of One increased. Any number by itself has very little value. Its value increases only when another number is put beside it. You think that all by yourself you have very little value. But when you come along with some other number, you increase not only your own value but also that of the other number. Didn’t I just prove that to you?”
Zero understood the point made by the mathematician. He was happy that the notion of the people that Zero has no value was baseless and wrong.
The point of sharing this story is that nowadays we find social media and other media channels abuzz with announcements from various offline and e-commerce platforms about bumper offers and huge discounts for the upcoming festive season wooing a wide range of consumers. Notably, the festive season has always been important to brands, especially to e-commerce players who line up big bumper discounts, look for more retail brands to partner and ramp up their product offerings. One of the attractions they sell is the ‘no-cost EMI’ or finance facility for a product purchase at Zero percent rate of interest.
How is this possible for a company to offer a loan facility without charging any interest, that too, when interest rates on loans and advances today are higher than normal? A newspaper ad about an LED television at zero percent finance attracted me to peep into the reality behind the scheme.
While trying to lay my hands on the opportunity, I encountered astounding facts. The cost of LED television was around Rs. 45,000. The scheme envisaged that the payment was to be made in a spread of six equated monthly installments (EMIs) of Rs.7,500. However, apart from this, I was asked to pay Rs. 1,000 as processing fee, which was described to me by the dealer as a gateway to avail the benefits of zero percent financing scheme. Paying this fee was not a big deal, but what I learnt during the deal was that the LED television was available at a cash discount of Rs.2,500. This means, on cash payment the television was available at Rs.42,500. Since I was buying the LED TV through a zero percent finance scheme, I was not entitled to the cash discount of Rs. 2,500.
So I was basically getting a finance of Rs.41,500 only and paying Rs.3,500 upfront (Rs.2,500 cash discount plus Rs.1,000 processing fee) for availing zero percent financing facility!
What I’m trying to explain is that these zero percent schemes have inbuilt hidden costs. Forfeiting the cash discount on a product that you could have otherwise got if you had bought it in cash is the biggest loss in such deals. Besides, you will also be paying a transaction or processing fee.
The gimmick of zero percent financing is an advertising stunt tailored jointly by manufacturers and the dealers of consumer durables to attract customers. But the truth is that zero percent financing is quite hard to find. Many of these offers are dilated with hidden charges. By nomenclature, a zero percent financing offer suggests that you are getting a loan facility with no interest included. The question is: Can anyone do business without earning profits? The whole point of a business is to garner profits. By virtue of this simple theory, this zero-percent financing offers no profit in itself and the financing companies load a variety of fees in the product which normally a consumer is unable to pick. You may be asked to pay annual, processing or some other kind of fees and even retroactive interest while availing the finance at zero percent interest.
I found that this zero percent financing is mostly having time limits. It will usually only apply for a specific amount of time. If you are not able to stick to the given timeline for full repayment of the loan, then you may be charged large interest amounts. These rates are commonly above 20 per cent, as interest will be charged on the original loan amount and not on the remainder.
Some companies pitch loan offers at zero percent rate of interest and some call it no-cost EMI offer. They play the trick with the nomenclature. To elaborate it further, no-cost EMI is an interconnected system between a retailer, bank/financial institution and the consumer. The consumer can purchase products and pay for them in monthly installments without any additional interest cost, the bank finances these purchases and earns interest income and the retailer shares a portion of its margins with the bank and the retailer gets increased sales. Here consumers do end up paying some cost, depending on the pricing of the product. Retailers typically offer two options to customers. If a consumer wants a certain discount, they have to make an outright purchase of the product. In a no-cost EMI option, the retailer offers the same product for full price (without any discount) with an EMI option.
Notably, there is a possibility that retailers may load the interest component into the actual price of the product and present a no-cost EMI for consumers to take advantage of the flexible payment option.
It is worth mentioning that the zero percent or no-cost EMI facility is not having Reserve Bank of India (RBI) backing. In the RBI books, the concept of zero percent interest or no-cost EMIs does not exist. So, the fair practice demands that the consumers be made aware by the companies about the value of zero in their offerings. Otherwise it’s against the basic principle of the fair business practice code and would amount to exploiting the vulnerable consumers.
So what are the precautions to be taken while availing zero interest or no-cost EMIs facility? The basic point is to understand the fine print of the facility. Let it be clear that there is no free lunch in the financial sector. It’s a gimmick and in almost all the cases, the consumer is paying the full price of the product, plus the taxes and other charges as may be applicable. However, in the absence of adequate finances, consumers have an opportunity to buy useful products that add value to their lives.
Sajjad Bazaz heads Internal Communication Department of Jammu & Kashmir Bank Ltd. The views expressed are his own and not of the institution he works for.