RBI BANS ZERO PER CENT INTEREST RATE SCHEME FOR BUYING GOODS

n order to promote transparent pricing of products and further

cause of customers protection, the Reserve Bank recently banned zero per cent interest rate scheme for purchase of consumer goods through credit cards. The decision which has far reaching impact may in short-run dampen festive spirit as sales of white goods goes up substantially during Diwali seasons. According to some estimates as much as 40 per cent of sales in some cases are through zero per cent interest rate scheme. Meanwhile, the central bank has also said that no additional charges could be levied on payment through debit cards. "...in principle, banks should not resort to any practice that would distort the interest rate structure of a product as this vitiates the transparency in pricing mechanism which is very important for the customer to take informed decision," RBI said in a notification. The very concept of zero per cent interest was non-existent and fair practice demanded that the processing charge and interest charged should be kept uniform product or segment wise, irrespective of the sourcing channel, such schemes only served the purpose of alluring and exploiting the vulnerable customers, it said. In the zero per cent EMI schemes offered on credit card outstandings, the interest element is often camouflaged and passed on to customer in the form of processing fee. "Similarly, some banks were loading the expenses incurred in sourcing the loan (viz DSA commission) in the applicable rate of interest charged on the product," RBI observed. The notification further said that the only factor that could justify differential rate of interest for the same product, tenor being the same, was the risk rating of the customer, which might not be applicable in case of retail products where the interest was generally kept flat and was indifferent to the customer risk profile. With regard to subvention, it said, the loan amount sanctioned for the purchase should be after taking into account the discount, rather than giving effect to the benefit by reducing the interest. Similarly, the RBI notification said: "If there is a moratorium period for payment available, the benefit should be passed on to the customer by ensuring that repayment schedule, including the interest servicing, commence after the moratorium period only rather than adjusting it in the interest." Thus in principle, banks should not resort to any practice that would distort the interest rate structure of a product as this vitiated the transparency in pricing mechanism which was very important for the customer to take informed decision, it said. Discounts on price or moratorium period for payment are often offered by the dealers or manufacturers on their products to the

customers while they make the purchase by availing loans from banks. In such instances, it is the responsibility of the banks, who are using their good offices to get the better bargain, to make the customers fully aware of these benefits and also pass on the benefits to them fully and indiscriminately while sanctioning loan for the purchase, it said. On levying additional fees on debit card transactions, RBI said there are instances where points of sales levy fee as a percentage of the transaction value as charges on customers who are making payments for purchase of goods and services through debit cards. "Such fee are not justifiable and are not permissible as per the bilateral agreement between the acquiring bank and the merchants and therefore calls for termination of the relationship of the bank with such establishments," it said. "These practices or products thwart the very principle of fair and transparent pricing of products which behold customer rights and customer protection, especially, in the more vulnerable retail segment," it said. Such practices violate, both in letter and spirit, various provisions of master circular on interest rate on advances "and therefore, you (banks) are advised to strictly desist from these practices hence forth," it added. In another consumer friendly decision, the RBI directed banks will have to bear the cost of fraudulent card transaction through point of sales that do not have prescribed security features. At the same time, it refused to give further extension to banks for complying with security norms. "It has been decided not to grant any further extension of time. Accordingly, banks not complying with the requirements shall compensate loss, if any, incurred by the card holder using card at POS (points of sale) terminals not adhering to the mandated standards," a notification said. In this context, it said, since the card holder would be approaching the card issuing bank for any fraudulent POS transaction in India which have occurred after September 30, 2013), the bank should claim the amount paid by it to the customer from the respective bank which have acquired the POS transaction in question. The card issuing bank would ascertain, within three working days from the date of card holder approaching the bank, whether the respective POS terminal where the said transaction occurred was compliant with mandated security features, it said. In the event it was found that the POS terminals were noncompliant as mandated, it said, the issuing bank should pay the disputed amount to the customer within seven working days, failing which a compensation of Rs 100 per day would be payable to the customer from the eighth working day. The acquiring banks have to pay the amount paid by the bank without doubt within three working days of the issuing bank

raising the claim, failing which the RBI would be constrained to compensate the issuing bank by debiting the account of the acquiring bank maintained with the bank, it said. The notification further said it was also clearly emphasised in circular dated June 24, 2013 that no further extensions would be granted. In addition, it was also indicated that in the event of a customer complaining of misuse of card after the date stipulated in this circular, the issuer or the acquirer who had not adhered to the timelines should bear the loss, it added.