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RBI spoils zero interest party

BS Banking Bureau in Mumbai

The next time you buy a computer, a white good or any other consumer durable, you may not be able to get a bank loan at 'zero interest rate.'

The Reserve Bank of India has discovered that even at a 'zero' interest rate, banks actually don't offer money free. It has directed banks to be transparent and tell the customers the 'cost' of a 'zero' interest rate.

What is more, it has also asked banks to refrain from being associated with advertisements selling consumer goods at a 'zero' interest rate.

A few foreign and new private banks have been aggressively doling out consumer loans at zero interest rates. They do not issue the advertisements themselves but lend their names to advertisements issued by dealers or product manufacturers. Some of the big non-banking finance companies too have been doing this.

How does the zero interest loan work? Does it come really free?

Here is what a banker says: "No loan comes free. In this case, the interest rate is grafted into the cost of the product. Normally, dealers pass on the discount to the banks, instead of to the customer. A customer can easily find out the actual cost of money if he sees the difference in the cost of the product bought with cash and bought through a bank loan."

A colour TV may cost Rs 16,000 on a down payment but Rs 19,000 when bought on a so-called zero-interest bank loan.

Now the RBI wants banks to be transparent and tell customers the actual interest costs. Banks seem to have no problem with this.

A senior bank official points out that the customers lose out owing to the lack of transparency. "The interest cost is bundled together with the product cost. Customers who do not want a loan at times suffer as they do not get the full discount," said a senior banker.

With the RBI directive, dealers will now have no choice but to make it clear how much discount they are offering to customers and how much they are sharing with the banks.

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