How Banks Manage to Provide No Cost EMI on E-Commerce Websites?

I was recently browsing Amazon.in to purchase an electronic item. When I checked out the payment options, I found many No-Cost EMI offers from various banks. A No-cost EMI means that the sum total of all your EMI payments is equal to the cost of the item. i.e., even though you make payments over many months, you do not pay a penny extra to the bank.



We have already seen how no-cost EMI makes up for an attractive offer for you. However, another aspect I discussed in the aforesaid post was that banks did not offer such schemes. And the reason was that, in 2013, the Reserve Bank had barred banks from offering Zero interest EMI loans. In that case, how are the banks offering No-cost EMI on e-commerce websites such as Amazon?

Here is how they do it. Here’s an excerpt from Amazon website:

Using the No Cost EMI payment option, the customers who undertake the purchase transactions on Amazon.in, will only pay amounts such that the total of these amounts during the EMI tenure is equal to the list price of the products as displayed on Amazon.in (at the time of making the purchase transactions). The participating sellers or brands (as the case may be) will provide amounts equivalent to the interest imposed by the banks to undertake the purchase transactions on EMI.

To make this a No Cost EMI offer, the interest amount will be discounted from the price of your order. Your card will be charged for the item price minus the discounted interest. The total amount you will pay to the bank (excluding GST) will be equal to the price of the item. The bank will charge GST on the interest amount.

Another excerpt

The bank will continue to charge interest on EMI as per existing rates. However, the interest to be charged by the bank will be passed on to you as an upfront discount at the time of your purchase, effectively giving you the benefit of a No Cost EMI. This discount excludes GST on interest amount that will be charged by your bank.

How the No-Cost EMI Scheme from Banks Work?

Here are the steps:

  1. Divide the item cost by the number of months of EMI to arrive at EMI amount (say Rs X).
  2. Figure out the loan amount (L) (at a certain rate of interest and no. of months) that would result in EMI of Rs X.
  3. Your discount is Item Cost – Loan Amount. Your credit card will be charged Rs L. This amount will be converted into EMIs.
  4. You will have to pay EMI for loan tenure. GST is charged on the interest amount.

Let’s understand the workings with the help of an example. I added a product to my Amazon cart and looked at various EMI options. The cost of the item is Rs 50,990.

Amazon No Cost EMI

Step 1

As you can see you can choose No Cost EMI option for 3 and 6 month payments.

16,997 x 3 = Rs. 50,991

8,498 x 6 = Rs. 50,988

So, this is clearly a zero interest EMI. However, as I wrote earlier, zero interest EMI is not permitted.

Step 2

To make this No cost EMI for you, the interest that you would have paid will be passed as upfront discount to you. However, how do you calculate the interest cost (since no rate of interest is specified)? In my opinion, we can assume the rate of interest (in this case) to be 15% p.a. since that is the case for all other EMIs. Essentially, your card will be charged an amount so that, at 15% p.a., the EMI is Rs 16,997 for 3 months or Rs. 8,498 for 6 months. And we can easily find out the amount using PV function PV (Interest rate/12, No. of months, -EMI, 0, 0).

= PV (15%/12, 3, -16997 , 0, 0) = Rs 49,742

Step 3

Therefore, your card will be charged Rs 49,742 (and not Rs 50,990). Essentially, the retailer/brand has offered you a discount of Rs 50,990 – Rs 49,742 = Rs 1,247.70. Your bank will convert the purchase amount into EMIs in a few days. Now you can see, it is not called No-cost EMI (not Zero Interest EMI) without a reason. There is still an interest cost. However, the upfront discount equal to the interest cost has been passed to you.

It Is Still Not a No Cost EMI

The reason is that you have to pay GST on the interest portion of your credit card statement. By the way, before the introduction of GST, service tax used to be levied on the interest portion. Let’s continue with the same example and see how.

Cost of the item₹ 50,990
No Cost EMI Tenure (months)3
Interest Rate (Assumed)15%
No Cost EMI₹ 16,997
Net Loan (Amount charged to your credit card)₹ 49,741
Upfront Discount to you₹ 1,249

Loan Schedule

MonthO/S at the start of the monthEMIInterestLoan repaid during the monthO/S at the end of the monthGST (18%)Total Monthly outgo
1₹49,741₹16,997₹622₹16,375₹33,366₹112₹17,109
2₹33,366₹16,997₹417₹16,580₹16,787₹75₹17,072
3₹16,787₹16,997₹210₹16,787₹38₹17,034

As you can, the GST on the interest amount has increased your monthly outgo. You are paying Rs. 225 extra (as GST) over the three months. Therefore, the amount paid by you to purchase the item is Rs 51,215 (and not Rs 50, 990). Even with this minor GST, the effective cost of this loan is 2.6% p.a. Not a No-cost EMI but the rate is lower than that you earn in a savings bank account.

Let’s look at the similar schedule for 6 month No cost EMI too.

Cost of the item₹ 50,990
No Cost EMI Tenure (months)6
Interest Rate (Assumed)15%
No Cost EMI₹ 8,498
Net Loan (Amount charged to your credit card)₹ 48,832
Upfront Discount to you₹ 2,158

Loan Schedule

MonthO/S at the start of the monthEMIInterestLoan repaid during the monthO/S at the end of the monthGSTTotal Monthly outgo
1₹48,832₹8,498₹610₹7,888₹40,944₹110₹8,608
2₹40,944₹8,498₹512₹7,987₹32,957₹92₹8,590
3₹32,957₹8,498₹412₹8,086₹24,871₹74₹8,572
4₹24,871₹8,498₹311₹8,187₹16,683₹56₹8,554
5₹16,683₹8,498₹209₹8,290₹8,393₹38₹8,536
6₹8,393₹8,498₹105₹8,393₹19₹8,517

You can see that the amount of discount is higher (Rs 2,158 vs. Rs 1,249) in this case. Since this is an upfront discount from the seller, the cost to the seller has increased. Perhaps, this is a reason why No-cost EMI from the banks are available only for shorter tenures. Longer tenure No Cost EMI schemes will cost sellers a lot of money.

What Should You Do?

In my opinion, No cost EMI schemes still make for a good option mathematically. Just make sure that you make credit card payments on time or else penalties will shoot up the cost for you. However, if you already have cash at your disposal, you may as well make the full payment (instead of opting for EMI). Not much difference.

At the same time, if there is an offer that you can avail along with the EMI scheme, No cost EMI scheme may make for a better choice (than the complete payment). For instance, recently, there was an offer of 10% cashback on Amazon if you choose to make payment through Citibank EMI scheme. The good part was that the cashback offer was available on No cost EMI option too.

If you know how the calculations work, you can make an informed choice and save money.

 



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