RBI diktat on 0% EMI will impact banks, consumer durable firms

The new Reserve Bank of India (RBI) diktat against ‘zero per cent easy monthly instalment (EMI)’ plans could have some interesting implications for the consumer finance and consumer durables industries. In essence, banks (and other financiers) used to offer ‘zero per cent EMI’ on many consumer durables. This meant the customer paid the sticker price for the goods in question, while the bank got a dealer-discount. This discount was opaque to the customer and effectively, it was the interest charged by the bank.

I assume that banks will now have to state upfront what discount they are getting, in the sense that they will state an interest rate for financing. In that case, the customer has the option of either buying the goods cash-down by demanding the same discount rate from the dealer. Or the customer could go shopping for a better rate of financing than the bank offers.

This measure reduces information asymmetry. Non-banking finance companies (NBFCs) still don't have to reveal their EMI interest rate. But it will be difficult for them to pretend they are offering zero per cent EMIs if they are charging a premium over the price revealed by the bank's rates. So, while NBFCs can under-cut the interest rates offered by banks, their charges will be known.

The average Indian consumer is value-conscious and likely to bargain hard if she has access to this information and knows what the differentials are. This may impact festival season buying and margins. Banks, NBFCs, consumer durables manufacturers and dealers will all have to rework their marketing structures. They will have to do this very fast since the festive season is upon us and the next four-six weeks is when the maximum consumer durable buying is likely to take place.

Is this likely to have an impact on third quarter (Q3) volumes for these industries? It should. Tentatively, I'd expect NBFCs to gain a bit while banks and consumer durables players will lose something. The consumer gains in almost every case.

The exceptional case would be the one where manufacturers quickly jack up the sticker prices so that they can offer exceptional “discounts”. They could cite some excuse such as higher material costs incurred due to the weak rupee, or point to the fact that multi-national competition will have raised prices for the same reason.

This could provide a possible “solution” to the problem caused by the RBI's untimely diktat. However, the consumer durables industry is in desperate shape and corporates may not be willing to protect margins in this way at the risk of losing volumes. Also, there's a fair amount of competition and so, there's unlikely to be a cartelised response of this nature.  Net-net, I think that Q3 could be less good for the consumer durables industry than it was hoping for and it will also impact bank incomes to some extent. It could be a drag for companies like Videocon and Bluestar and also perhaps, have a negative impact on automobile and two-wheeler sales.

The author is a technical and equity analyst