Truth in lending

The Reserve Bank of India (RBI) has good reason to clamp down on ‘zero per cent’ interest loans by banks. These loans are a fiction, used to lure unsuspecting customers into buying goods at marked-up prices, which are then usually sold in the form of ‘zero-interest’ equated monthly instalments (EMIs). The RBI is absolutely correct in drawing attention to the absence of ‘accounting integrity’ in such lending practices. Accordingly, it has directed banks to sanction consumer loans only after factoring in the price discounts or subventions offered by manufacturers. This means banks can no longer camouflage the interest they charge by not disclosing the discounts and processing charges for such loans.

Consumer goods manufacturers and retailers have not taken kindly to the ban on ‘zero-interest’ EMI schemes, especially as it has come just ahead of the festival season. They argue that such schemes are a win-win situation for all. For one, they help attract consumers and increase sales for manufacturers, who are in turn induced to offer deals intermediated through banks. The banks are also happy with such an arrangement since the interest they would normally charge is offset by manufacturer discounts. In short, since everyone seems to be benefitting, why should the RBI make such a fuss?

The short answer is that such loans violate the principle of transparency in pricing. Customers who avail of ‘zero-interest loans’ should be told the true price of the products they purchase. This sort of disclosure is exactly what legislations such as the Truth in Lending Act – the federal law in the United States that was drafted to encourage the informed use of consumer credit – seek to ensure. A ban on zero-interest EMI schemes is really not much more than an insistence on communicating the fair price of products to consumers, who have a right to take informed decisions about their purchases. The fact that it will dampen consumer sentiment – 30 to 35 per cent of consumer durables are sold via such schemes – cannot be ignored. Coming as it does before the festive season, it is hardly surprising that consumer durable firms are upset by the RBI’s decision. But this cannot be a reason to privilege expediency over principle.

The RBI’s direction that banks terminate their relationship with retailers who levy charges on customers making payments with debit cards is also welcome. Such steps are necessary in an economy where cashless transactions and instalment purchases are increasingly becoming the order of the day. While it is not the aim of regulation to stifle consumer spending, this cannot be at the cost of sacrificing consumer awareness.

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