Why converting purchases to EMIs may no longer get you a discount
The directive in Bajaj Finance’s case stemmed from its violation of the central bank’s mandate to issue a ‘key fact statement’ to borrowers. The NBFC, as per RBI, did not issue ‘key fact statement’ got two of its products—a buy now pay later (BNPL) card, called Insta EMI, and through eCOM, a digital consumer loans financing facility. EMI is short for equated monthly installments.
Both the RBI measures aim to tighten the norms on unsecured loans, which have grown exponentially in the last few years. A report by Transunion Cibil shows that since January 2022, personal loans of less than ₹50,000 have accounted for approximately 25% of total origination volumes of all retail loans, which includes personal, education, travel, consumer durable, car and two-wheeler loans. Citing data from Crif highmark credit bureau, Reuters reported in October that loans of ₹10,000-50,000 grew 48% in fiscal 2023, while smaller loans below ₹10,000 grew 37%.
This growth is mainly driven by fintechs and NBFCs (which have a co-lending tie-up with banks) offering small digital loans packaged in different forms—no cost EMIs, BNPL, credit lines bundled with payment wallets of e-commerce companies, heavy discounts on credit card EMI transactions, etc. It’s not just easy availability of credit that has led to the surge in demand but credit being indiscriminately given on virtually everything being sold online as well as offline.
This has resulted in the higher dependability of consumers on credit for small purchases and higher delinquencies. The 2 November Cibil report shows that in the April-June quarter of 2023, about 51% of consumers who took small-ticket personal loans already had more than four credit products at the time of availing another new loan. Delinquency rate for consumers with at least one small-ticket personal loan increased by 120 basis points to 5.4% in the last one year.
The central bank had taken note of this and in September 2022 issued guidelines to regulate the highly fragmented digital lending space. This included the mandate for all regulated lenders to issue a key fact statement that should contain details of the loans, including loan amount, total interest outgo, loan tenor, other charges like processing fee and convenience fee, etc, effective annualized rate calculated on the basis of IRR (internal rate of return) method and the net disbursed amount, among other things.
These newer forms of digital loans marketed under different names often don’t disclose the different fees and high interest rate charged to the consumer on loan offerings upfront. It is thus difficult for the borrower to ascertain the net amount they are paying as the e-mandates for payments are pre-configured. Hence, the breakdown of details in the key fact statement is meant to show the borrower the actual cost of the loan they are taking.
“The KFS (key fact statement) is a standardised statement provided as part of the loan application process to ensure transparency and enable borrowers to make informed decisions about their loans. The lender is expected to provide it at every stage of the loan application process, Specifically, the KFS needs to be prominently presented to the borrower before executing the loan contract,” said Adhil Shetty, CEO, BankBazaar.
RBI, in its notice to Bajaj Finance, stated that the lender failed to issue key fact statements to the borrowers under its two lending products and there were deficiencies in the key fact statements issued in respect of other digital loans sanctioned by the company.
Srikanth L of Cashless Consumer, a fintech consumer collective, said while it’s rightful if the central bank has found deficiencies, it’s hard to say how many products or companies RBI has audited and whether it has found fault only with Bajaj Finance. “RBI doesn’t reason out such notices which show selective application of its regulations,” he said. “In some cases, the key fact statement is just given as a bill after the loan is disbursed so you don’t know how the bill is split beforehand.”
Further, to contain the impact of the unbridled rise in unsecured loans, the RBI has increased weight risks on loans in this segment. Cibil said even though delinquencies on small-ticket personal loans have a marginal impact on the personal loan portfolio, these should be monitored closely because consumers may prioritize other payment obligations in place of personal loan payments, which, in turn, may be a wider indicator of financial stress.
This is likely to push up interest rates on personal loans and credit cards. Borrowers should be careful to check the terms of the loans before taking one. “Credit is not a bad thing in itself if used responsibly. Credit products are packaged in a way to appeal to the consumers. No-cost EMIs are an example. Don’t borrow too much and read the terms carefully to check repaying capability,” said Deepak Raghaw, founder, PersonalFinancePlan, and a Sebi registered investment adviser.
The cost of free EMIs
The Bajaj Finserv Insta EMI card allowed consumers to buy products on no-cost EMIs, which means the instalment doesn’t carry an interest component. But, there were a host of other charges to be paid. These charges included a network fee of ₹530, convenience fee of ₹69 and annual fee of ₹117 if the card isn’t used in the preceding year. The biggest cost was a processing fee of up to ₹5,000 charged on availing a loan limit. Besides, there is the staggeringly high annual penal interest of 42% if one defaults on paying the EMI on time. All lenders charge these fees on no-cost EMI loans.
Though you may not be paying interest on the purchase, you still end up paying more than the purchase value of the product because of such extra charges. “There are no free lunches. Lenders have formed these new products to pass on interest or other charges in different forms,” said Srikanth. Say, on a loan of ₹50,000, if you have to pay ₹1,000 as different charges, then you would be paying 2% extra on a ‘no-cost’ loan.
Discounts on credit card EMIs
The recently concluded festive sales were offering discounts in two forms—10-15% flat discounts and a 5% or more extra discount if you purchase the same product on EMIs using a credit card. By giving this extra incentive, the lenders are basically selling you a loan as EMI transactions through a credit card are not the same as making a purchase with credit cards. In the former, you don’t get an interest-free window and so are supposed to pay interest on each EMI.
“On the face of it, the arrangement looks mutually beneficial to everyone. The consumer gets liquidity for purchases they want to make but don’t have enough funds, the merchant gets the sale and the bank gets MDR and interest. The consumer should calculate by how much the upfront discount gets offset by the interest rate,” said Raghaw.