Credit rules festive sales, 3 out of 4 products sold through no-cost EMIs

One out of four purchases made during the Great Indian Festival sales, which kicked off on October 8, were through EMI and three out of four products were sold on no-cost EMIs, said Amazon

Credit schemes like zero-down payments, no-cost EMIs, and pay-later options, have played a key role in driving consumer sales this festive season. Around 50 per cent of festive sales originated from various paper financing options, several e-tailers and non-banking financial corporations told Business Standard.

One out of four purchases made during the Great Indian Festival sales, which kicked off on October 8, were through EMI and three out of four products were sold through no-cost EMIs, said Amazon. The month-long festive sales event also saw Amazon Pay Later usage rise 2.4 times compared to the same period a year ago, with EMI share doubling as the e-commerce giant expanded credit through the Pay Later option to Rs 1,00,000, from earlier Rs 60,000.

“Exciting bank discounts and unique rewards during the month-long Great Indian Festival 2023, helped customers save over Rs 600 crore,” said Amazon India.

The demand for retail credit is so high that new models like ‘Buy Now Pay Later’ are getting increasingly popular in a short time, shows data gathered by Credit Fair, an NBFC that deals in both personal and business loans. During the festive period about 40-60 per cent of sales were through EMIs, said Aditya Damani, Founder and CEO, Credit Fair.

For electronics chain Vijay Sales, the majority of their customers opted for the zero down payment and longer tenure schemes.

In zero-down payment, buyers finance the entire purchase and repay through instalments. In no-cost EMI, no interest is charged, but there might be a one-time processing fee.

Today many banks and NBFCs are also offering flexible pay options on credit card dues and personal loans. The scheme allows you to stretch the EMI tenure, but the interest rate on the same varies with longer tenure options.

"Nearly 75-85 per cent of our business is on finance, out of which 50 per cent is paper finance and 50 per cent is on credit cards," said Nilesh Gupta, Director, Vijay Sales.

In 2022, only Apple had a zero-down payment option available for its phones while this year Samsung came out with a similar option on its premium phones, followed by other consumer-durable brands, said Gupta.

Lotus Electronics, an online electronic store saw only 20 per cent of their consumers pay with cash, while 45-50 per cent of payments are made through paper financing, around 20-25 per cent through credit cards, and the rest via UPI payments.

"For us, the show-stopper has been the zero down payment. The consumer is looking for a solution where he does not need to pay anything upfront, and the entire amount is given back to him in equal instalments. Apart from this, any scheme which has longer tenure works well with the consumer," said Gaurav Pahwa, Director, Lotus Electronics. He noted that this season there has been a growth of over 20 per cent in paper finance and credit card purchases.  

This scheme can be explained with an example: on Bajaj Mall, the online marketplace of Bajaj Finserv, the OnePlus Nord CE 3 Lite is available with a zero-cost EMI option and zero down payment. The smartphone, priced at Rs 21,975, can be purchased with six equal instalments of Rs 3,663. However, Bajaj Mall also charges a processing fee and a convenience fee along with the first EMI. The same phone is available for Rs 21,999 on Amazon, with similar financing options.

How did credit schemes become consumer favourites?

While online platforms such as Amazon, Flipkart, and others offer no-cost EMI on various cards, pay-later, and zero-down payment options, many retailers have tie-ups with banks and financial institutions like Home Credit, Bajaj Finserv, and HDB Financial Services, making it easier for consumers to apply for loans at the checkout stage. Banks and other financial institutions have also rolled out wide-ranging loan options with low-interest rates, flexible repayment options, and enticing cashback or reward schemes.

For example: During the Diwali sale, ICICI Bank Credit Cards offered up to a 15 per cent discount on leading brands and e-commerce platforms such as Flipkart, Myntra, Amazon, and Tata Cliq. Discounts were also available at Reliance Digital, Croma, and Vijay Sales.

SBI Card provided up to Rs 10,000 cashback on EMI transactions on Vivo, along with up to 26 per cent instant discount on LG, up to 20 per cent instant discount on IFB, and a 10 per cent instant discount on Flipkart.

Standard Chartered also offered up to 22.5 per cent cashback on LG with a credit card EMI transaction.

Users of these credit schemes find them budget-friendly, allowing them to acquire desired items without a significant one-time expense.

Rishabh, a university student who works part-time as a trip coordinator, purchased a Rs 9,499 TV using the pay-later option on Flipkart.

“Rs 9,500 TV cost me around Rs 10,500; I paid Rs 1,164 as an EMI for nine months. Although it cost me a bit more, I was able to manage with my limited income,” said Rishabh.

These financing deals have made it easier for consumers to switch to more premium products. Amazon during its festive sale season, sold 2.5 times more smartphones in the premium segment as compared to last year, driven by affordability options such as no-cost EMI and exchange offers, the company said. Amongst all smartphones sold, 60 per cent were 5G ready and 70 per cent of all smartphones orders came from Tier 2 and below towns.

“During the Amazon Great Indian Festival, growth of premium appliances including ACs, Washing Machines, and Refrigerators among others was 2.5 times with over 45 per cent of the customers preferring to upgrade to premium appliances,” said Amazon.

Credit schemes pushing credit card spend

Unsecured personal loans have grown nearly 23 per cent on year, while  while outstanding amounts on credit cards jumped 28 per cent, as per RBI data. As of October 20, 2023, credit card outstanding stood at Rs 2.4 lakh crore, up from Rs 1.8 lakh crore in October 2022.

“The RBI data suggests that the card spending at shops and on e-commerce sites for this October surged by approximately 17 per cent compared to October 2022. Electronic products like mobile phones, TVs, fridges and washing machines saw a surge in demand during the festive season,” said Adhil Shetty, CEO, Bankbazaar.com.

Notably, most no-cost EMI options available online come with credit cards from leading banks or in partnership with NBFCs or fintech firms.

During Amazon’s month-long Great Indian Festival (GIF), three in four prime members opted for Amazon Pay ICICI Bank co-branded credit with usage going up 25 per cent when compared with 2022. According to the e-commerce platform, offers from six Banks including SBI Banks, ICICI Bank and others were accessible to 65 per cent of India's credit card base and 36 per cent of India's debit card base.

 

“No-cost EMIs and flexible loan tenure have contributed significantly to the rise of consumer loans in India. These options have made credit more affordable and accessible to a wider range of consumers, especially those with lower incomes or limited credit histories. These options give consumers more flexibility to choose a repayment plan that fits their budget,” said Shetty.

RBI action on rising unsecured credit

Even before the festive sales, the growth in bank lending to select personal loan segments has witnessed significant growth, which can be seen in the figures on bank lending to certain personal loan segments below, said Sanjay Agarwal, Senior Director, CareEdge Ratings.

Source: CareEdge

The surge in unsecured personal loans, especially in small-ticket size loans, facilitated by app-based lending has been a growing concern for regulators. 

In response to default risks, the RBI raised risk weights for unsecured credit and lending to finance companies in November 2023, requiring banks to allocate more capital for such exposures.

The new regulatory measures by the RBI apply to all consumer credit except education loans, car loans, home loans and gold loans. It requires lenders to set aside higher capital for consumer loans including no-cost EMIs and credit card receivables.

According to Pahwa, the effect of RBI’s decision can already be seen.

“Earlier, NBFCs used to provide EMI cards with a pre-set purchase limit, let's say Rs 5 lakh. A customer could go to any store and use those cards for purchases. However, with this move, those cards are set to go away,” said Pahwa. He noted that the restriction on Bajaj’s Insta EMI Card has especially jolted the industry.

Now, industry participants expect demand for unsecured loans to be impacted if the NBFCs and credit card providers decide to raise interest or change the terms of lending.  

According to Sanjay Agarwal, if banks and NBFCs decide to raise interest on unsecured loans there will likely be a moderation in the growth of unsecured loans, because the salaried class, which gets loans at around the 10 per cent range, is sensitive to any change in interest rates.  

However, he noted that the demand for unsecured loans from customers who take personal loans at 12 per cent or more, will not be affected as they are not as sensitive to a moderate hike in interest rates.

“The system had already turned cautious when it came to credit card approvals, as credit card approval rates have declined from around 30 per cent to 20 per cent. Those who still receive credit might face stricter terms and conditions,” said Agarwal.