CREDIT choice. The EMI-sation way – credit now comes in a sachet

“You’re gonna be, a shinin’ star In fancy clothes, and fancy cars And then, you’ll see, you’re gonna go far. So, live your life…”

Indian consumers seem to be singing Rihanna’s popular tune loud and clear this festive season and determined to get whatever they want to live their life. And, why not? Thanks to the financially-attractive Equated Monthly Instalment (EMI) offers on almost everything on sale, they are making India literally an EMI-nation.

Transformative tools

In a financial sense, EMI is a transformative financial tool allowing customers to divide the total price of a purchase into fixed monthly instalments over a period, making it affordable and convenient to pay. For merchants, it means higher sales, more loyal customers and transactional value and lower risks.

Why EMI-sation? EMIs raise affordability as customers tend to buy larger-ticket items more often due to the convenience. Often compared with the sachet revolution in the FMCG sector a few decades earlier, the EMIs on debit or credit cards have helped the overall consumption growth in India’s vast semi-urban and rural areas. From buying a holiday or getting a cosmetic surgery or purchasing a 75-inch TV or iPhone 15, customers are no longer holding back desires. For banks, it helps they are offering EMI products largely to a set of pre-approved customers only to mitigate credit risk.

According to a survey, many say it even facilitates financial planning goals on a monthly basis as it gives flexibility to manage unforeseen expenditure or financial emergencies. Also, the role of EMIs in imparting primary lessons on financial literacy is something not much discussed about. Since customers need to provide for monthly instalments, it goads them into getting better credit score, thus improving credit inclusion.

Industry estimates show EMIs have contributed to rising credit penetration — from 15% in 2017 to 21% in 2020. Also, EMI users had greater credit awareness, checked credit score regularly and possessed better repayment behaviour with lower delinquency rates.

Covid-fuelled EMIs

The trend that has been capaciously visible since Covid-19 days has hit a new peak now, official data and private research show. In the immediate aftermath of Covid, when consumers were constrained by several factors, debit card EMI transactions and no-cost EMI offers became an instant hit, posting a phenomenal 220% growth in transactional volumes in July 2021 vs. February 2020. Then came the interest rate increases by the RBI which turned customers away from outright purchases. Sustained inflation also made the case for easier financing tools.

Thus, the scenario since 2019 had helped propel the rapid journey towards ‘affordability solutions’ which eventually lifted the customers’ purchasing power and confidence.

Boosting growth

According to estimates, India will witness a 50% growth in online shopping in the next three years to touch 30 crore users by FY26 as innovations around EMI offers have given enough confidence to those new to credit.

The awareness-induced change in customer behaviour is very evident. Today, they demand EMI options for any product or service costing ₹10,000 and above. We are also seeing trends where customers are clear about the next product to be purchased on EMI, when 2-3 instalments of the existing product are left to be paid.

Generational shift seems to be another key element in this upturn. The shift, in a way, has been ably aided by financial influencers contributing by creating awareness on benefits of prudent credit consumption and investing available capital for healthy returns.

In a country which has a significant percentage of youth among its demographic profile with information and access to the best of products and services in the world, affordability has been the tipping point needed to kindle the EMI revolution.

Affordability has also been made possible by white-goods makers, e-com firms and others wanting to offer products or services on EMIs, partnering banks to create a financially-attractive proposition. Consequently, these brands saw pick-up in sales on a new base of customers flocking to them.

In a consumption-driven economy like India, EMIs will continue to play a major role in growth. Research shows consumer lending is on a major upswing and EMIs account for a significant part of it. Here, digital channels have a big role in disbursing timely credit and lenders in offering innovative and personalised EMI solutions.

(The writer is Business Head – Consumer Finance, Kotak Mahindra Bank Ltd.)

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