April 10 2020
The lure of the monthly instalment
24 December 2018

Quick access to credit spurs aspirational buying but also fuels loan defaults as borrowers exceed limits

The advent of the equated monthly instalment (EMI) option for online payments is increasingly appealing to the aspirational Indian, since it allows her to buy products she wouldn’t have otherwise been able to afford. But on the flip side, this easy manner of consumption could also be leading the charge in loan defaults, industry players say.

The EMI option for payments first started in the offline retail market, where lenders such as Bajaj and Tata entered the market and offered zero-interest EMIs to customers looking to make white goods purchases. Credit card firms then entered the fray since they were losing customers who would have otherwise paid the entire amount using the credit card. Soon, as transactions increasingly moved online, the EMI model also shifted online.

Zero-interest formula

“The way a zero-interest EMI works is, firstly, the manufacturers give a subvention to the lender,” Bala Parthasarathy, co-founder & CEO, MoneyTap, explained. “So, let’s say Samsung is the manufacturer and Bajaj is the lender. The two would have worked out that for some models that Samsung wants to push, Bajaj would get a cut. If it’s a ₹20,000 phone, then Bajaj would get about ₹1,500, for example. But the consumer does not pay anything extra.”

“So, the merchant likes it because he wants the transactions, which are more likely because the customers feel they are paying a smaller amount using the EMI option,” Mr. Parthasarathy added.

“The customer is happy because the payments are staggered over a period of time, at no extra cost. The manufacturer is happy because they are getting to push their product, and the lender is happy because they are getting a customer on their books to whom they can then try to sell other products.”

Mr. Parthasarathy said that doing a credit check on a customer was easier when transactions were offline, but was tougher for most online EMI requests. However, within the online space, EMIs taken through credit cards made credit worthiness checks easier since the credit card companies had already performed them.

Three aspects

“It is a function of three things,” Aditya Kumar, founder & CEO of Qbera.com said. “Firstly, people are becoming more aspirational and comfortable with credit. Earlier, the logic was that if the customer could only afford to spend ₹6,000 on a phone, then they would only spend that much. But today the thinking is that ‘I can only afford a ₹6,000 phone today, but I can actually afford to pay a ₹2,000 EMI for the next 12 months’. So that means the customer can buy a ₹20,000 phone or more.”

The second point, Mr. Kumar explained, was that there has been a sharp increase in the availability of EMIs for a larger group of people, through both incumbents and (new) fintech players. In other words, there are a lot more players willing to offer customers EMIs than ever before.

And the third point, he said, was simply the implementation of the no-cost EMI model, since this places no additional burden on the customer while allowing them to purchase an aspirational item.

However, the advent of the online EMI payment option is not all rosy or full of happy stories. The flip side to such easy access to credit and financing for consumption is that people often get carried away and begin to default on their payments.

“We do see it a lot with customers who become delinquent due to actions like this,” Ranjit Punja, CEO and co-founder of CreditMantri told The Hindu. “Let’s say I earn ₹40,000 a month and the cellphone I want costs ₹50,000; I am typically living month-to-month on the salary, so I won’t be able to pay for the cellphone in one shot. But I am willing to pay up to ₹5,000 a month. So I buy it. Next month, there is an offer on TVs, and in the third, there is an offer on vacations.”

“This is an exaggeration to illustrate the example, but very soon what started as a ₹5,000 EMI has become a ₹25,000 EMI,” Mr. Punja added. “But my salary has not changed in the interim. So, that’s where the defaults come about.”

Sector experts said that one manner in which this problem could be addressed is for the credit rating system to evolve to measure the online behaviour of customers.

Currently, credit bureaus only look at the credit card and loan repayments behaviour of a customer. But, online purchase activity has evolved and requires a new approach, they said.



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