Why converting purchases to EMIs may no longer get you a discount

The directive in the case of Bajaj Finance arose out of its breach of the central bank’s mandate to issue a ‘statement of key facts’ to borrowers. The NBFC, according to RBI, did not issue a ‘statement of key facts’, it acquired two of its products – a buy now pay later (BNPL) card, called Insta EMI, and through eCOM, a digital consumer loan financing facility . IEA is short for equal monthly installments.

Both the RBI measures are aimed at tightening unsecured lending norms, which have grown exponentially in recent years. A report from Transunion Cibil shows that from January 2022, personal loans less than ₹50,000 was about 25% of the total origination amounts of all retail loans, including personal, education, travel, consumer durables, auto and two-wheeler loans. Citing data from highmark credit bureau Crif, Reuters reported in October that loans from ₹10,000-50,000 grew 48% in fiscal 2023, with smaller loans below ₹10,000 grew by 37%.

This growth is mainly driven by fintechs and NBFCs (who have a co-lending tie-up with banks) that offer packaged small digital loans in various forms – no-cost EMIs, BNPL, credit lines bundled with payment wallets of e-commerce companies, heavy discounts on EMI transactions with credit cards, etc. The increase in demand has not only been due to the easy availability of credit but the fact that credit has been given indiscriminately to almost everything sold online and offline.

This has resulted in greater reliance by consumers on credit for small purchases and higher delinquencies. The 2 Samhain Cibil report shows that, in the April-June 2023 quarter, around 51% of consumers who took out small-ticket personal loans already had more than four credit products when they took advantage of another new loan. The delinquency rate for consumers with at least one small-ticket personal loan increased by 120 basis points to 5.4% over the past year.

The central bank took 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 statement of key facts which should contain the details of the loans, including the loan amount, total interest disbursement, loan tenor, other charges such as processing fee and facility fee, etc., an effective annual rate calculated on the basis of the 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 do not disclose the various fees and high interest rate charged to the consumer on advance loan offers. It is therefore difficult for the borrower to know the net amount he is paying because the e-mandates for payments are pre-configured. Therefore, the breakdown of the details in the statement of key facts is intended to show the borrower the actual cost of the loan he is taking.

“The KFS (key facts statement) is a standardized 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 must be prominently presented to the borrower before the loan contract is executed,” said Adhil Shetty, CEO , BankBazaar.

RBI, in its notice to Bajaj Finance, said the lender failed to issue key fact statements to the borrowers under its two loan products and there were deficiencies in the key fact statements issued for other digital loans approved by the company.

Srikanth L of Cashless Consumer, a fintech consumer conglomerate, said that while it is true that the central bank has found lapses, it is difficult to say how many products or companies RBI has audited and whether it has found fault with only Bajaj Finance . “RBI does not give reason for such notifications which show that its regulations are applied selectively,” he said. shared in advance.”

In addition, to limit the impact of the unrestrained increase in unsecured loans, the RBI has increased risk weights on loans in this segment. Cibil said that while small-ticket personal loan delinquencies have a marginal impact on the personal loan portfolio, these should be closely monitored as consumers may prioritize other payment obligations instead of personal loan payments, which could be a broader indicator afterwards. financial stress.

This is likely to increase interest rates on personal loans and credit cards. Borrowers should be careful to check the terms of the loans before taking one. “Credit in itself is not a bad thing if used responsibly. Credit products are packaged in a way that will attract the consumers. No-cost EMIs are an example. Don’t lend too much and read the terms carefully to check the repayment capacity,” said Deepak Raghaw, founder, PersonalFinancePlan, and a Sebi-registered investment advisor.

EMI cost free,

The Bajaj Finserv Insta EMI card allowed consumers to purchase products on no-cost EMIs, meaning the installment has no interest component. But, there were many other fees to pay. These charges included a network charge ₹530, convenience fee of ₹69 and annual fee thereof ₹117 if the card is not used in the previous year. The biggest cost was a processing fee of up to ₹5,000 cut on availing loan limit. In addition, the annual penalty interest is extremely high at 42% if one fails to pay the IEA on time. All lenders charge these fees on no-cost IEA loans.

Although you may not be paying interest on the purchase, you will still be paying more than the purchase value of the product because of these additional fees. “There are no free lunches. Lenders have come up with these new products to pass on interest or other charges in various forms,” ​​said Srikanth. Say, borrowed from ₹50,000, if you have to pay ₹1,000 as miscellaneous charges, then you would be paying an additional 2% for a ‘no cost’ loan.

Discounts on credit card EMIs

The recently concluded festive sales were offering discounts in two forms – flat discounts of 10-15% and an additional discount of 5% or more if you buy the same product on EMIs using a credit card. By giving this extra incentive, lenders are essentially selling you a loan because EMI transactions through a credit card are not the same as making a purchase with a credit card. In the first one, you don’t get an interest free window so they are supposed to pay interest on every EMI.

“In that way, it seems like everyone benefits from each other. The consumer gets liquidity from purchases they want to make but they don’t have enough money, the seller gets the sale and the bank gets MDR and interest. The consumer should calculate how much the advance discount will be offset by the interest rate,” said Raghaw.