What do 0% EMIs hint at?

Thu, 26 Sep Pre-Open

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The '3-6-3 rule' does not seem to apply any more to the banking sector. The'3-6-3 rule' means that a banker would borrow funds at 3%, lend at 6%, and then be playing golf by 3 pm. Thus banks could manage all its expenses and still keep decent profits by only form of business being lending out money at a higher rate and paying out less to its depositors. But, things have now changed. Thebusiness of banking is not that simple anymore . The challenges have intensified. Today the banking sector is not only facing the competitive pressures, but the regulatory requirements from the Reserve bank of India (RBI) have also become more stringent.

Recently, the RBI has issued a circular to the banks. The RBI has sought more disclosures under the 0% EMI schemes. This step by RBI was taken in order to have clear details of the "hidden costs" involved in these transactions. This would include giving details of the cash discounts and processing charges involved in a specific transaction. Though the RBI has not asked banks to discontinue this scheme, however the disclosure norms seem to threaten the banks and thus these banks are looking to discontinue such schemes. So will the impact of discontinuing these schemes be limited to consumers? No, there is much beyond that...

The Indian economy is witnessing growth pressures. Large industries such as mining, textile, iron and steel, power, airlines etc are all seeing stress. As a result demand for loans from corporate has fallen dramatically. Since some time, these EMI schemes have been one of the important revenue contributors for the banks from the retail segment. And thus discontinuing these schemes will hamper the earnings for these banks too. Other than this, the consumption of the consumers will too get impacted which in turn will impact the growth of the other sectors.

Thus these disclosure requirements seem to plague the credit card segment of the business, through which these EMI schemes funded. Not only that, the possibility of NPAs rising in the credit card segment remains high. Already, the PSU banks have been facing tough time due to deteriorating asset quality . In such challenging scenario what should investors do?

In short, the 0% EMI schemes were an indicator of the poor tactics employed by banks and consumer durable companies to lure buyers. But the RBI sees this ballooning into something much bigger - a habit to spend more than income. With both income growth and job creation coming to a standstill, the RBI's measure is certainly with a lot of foresight.