No-cost, longer-tenure EMIs gain traction, drive consumer product sales

Notably, to address the concern of the rapid rise in unsecured consumer loans, the RBI increased the risk weight on consumer credit

Longer-tenure EMIs (equated monthly instalment), buyback guarantees, and other similar instruments are driving sales of cars, consumer durables, and electronic goods. As the price of these products goes up and the users aspire to buy the higher trims, easy borrowing schemes are gaining traction, The Economic Times (ET) has reported.

On the other hand, brands said that if the cost of borrowing goes up for such consumer loans, they may have to let go of their margin, the report said. This is especially true for no-cost EMIs, where the cost of interest is borne by either the manufacturers alone or in partnership with retailers. Notably, to address the concern of the rapid rise in unsecured consumer loans, the Reserve Bank of India (RBI) increased the risk weight on consumer credit, which includes credit card receivables and bank loans to non-banking financial companies (NBFCs).

 

RBI's latest decision is likely to force banks and non-banking entities to set aside more capital, which can result in increased lending rates. President of Haier India, Satish NS told ET, "So, any increase in borrowing cost will have to be borne by the brands or they may pass it by marginally increasing product prices."

2 in 5 cars sold were above Rs 10 lakh

As the consumer preference to buy higher, more expensive variants of cars, grows, the demand for longer-tenure EMIs also rises. The phenomenon is also associated with a higher loan-to-value (LTV) ratio.

Head of retail finance at Landmark Group, a luxury and premium automotive retail chain, Nikhil Ranade was quoted in the ET report as saying, "The LTV used to be around 90 per cent in the pre-Covid period, but post-Covid, most customers are preferring it to be anywhere between 90-95 per cent."

Also Read: Luxury carmakers Mercedes, Audi see record sales in festive season

The average loan tenure has also moved up from 50 to around 56-58 months, meaning that more and more customers are opting for a tenure of 60 to 84 months, Ranade added.

Rising EMI-based purchases for electronic appliances

Like cars, electronic items like televisions, smartphones, refrigerators, and other appliances also registered a 5-7 percentage points growth this year, the highest in at least five years, the ET report said. Notably, brands have come up with no-cost EMI options even for entry-level products and in small stores, the report said citing industry experts.

The ET report cited data from Counterpoint Research and said that the share of no-cost EMI-based smartphone purchases stands at 33 per cent of all transactions. It was at 28 per cent last year. Companies are now offering such options for smartphones costing above Rs 10,000. Until last year, such offers were only available for mobile phones that cost Rs 20,000 and above.