No-cost EMI (Equated Monthly Installment) schemes have become increasingly popular among consumers, offering them the convenience of purchasing goods and services without incurring interest charges. No-cost EMI options indeed provide consumers with the flexibility to purchase their desired gadgets and products in convenient installments without incurring any interest charges. Typically, when individuals avail financing from banks or other financial institutions, they are subject to interest rates ranging from 10% to as high as 40%. However, with the allure of no-cost EMI, customers can bypass these interest fees altogether, making their purchases more financially manageable.
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How no-cost emi is calculated?
The calculation for a no-cost EMI option is relatively straightforward: it involves dividing the price of the product by the tenure in months for which the financier is willing to lend the loan.
No-cost Emi = Price of the product/ Tenure of loan
Suppose you bought a product by no-cost emi. If the price of the product is Rs 30,000, and the tenure is 6 months. Then you’re emi would be 30000/6 i.e. Rs 5000 per month.
| Price of the Product | Duration | EMI |
| Rs 30,000 | 3 Months | Rs 10,000 |
| Rs 30,000 | 6 Months | Rs 5,000 |
| Rs 30,000 | 9 Months | Ra 3,333 |
| Rs 30,000 | 12 Months | Rs 2,500 |
Now the question arises: Why do banks provide interest-free loans, and what benefits do they derive from such arrangements?
Well technically there are some hidden charges that banks levy to generate revenue.
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How Banks earn from No-Cost Emi?
Merchant Discount Rate (MDR)
Banks charge merchants a fee known as the Merchant Discount Rate for processing EMI transactions. MDR is typically a percentage of the transaction value and contributes significantly to the bank’s revenue. While customers may not bear the burden of interest, merchants compensate for the MDR by inflating product prices.
Processing Fees
Despite offering zero interest to customers, banks often levy processing fees upfront for setting up and managing the EMI facility. These fees cover administrative costs associated with processing EMI transactions and contribute to the bank’s earnings.
Higher Product Prices
Merchants may increase the prices of products sold under no-cost EMI schemes to compensate the costs incurred from from offering zero interest. Banks indirectly benefit from this practice as they earn higher MDR fees on these inflated transaction values.
Selling Extra Services
Banks use no-cost EMI offers as an opportunity to sell other financial products or services to customers.
By expanding their customer base, banks can generate additional revenue streams through credit cards, insurance, or investment products. For example, customers availing EMI options may be more inclined to sign up for credit cards or investment products offered by the bank, thereby generating additional revenue streams.
Increased Sales Volume
By providing customers with the option of purchasing goods on EMI without any interest, banks can attract more consumers to make high-value purchases. This boosts sales volume for both the banks and the merchants selling the products.
Customer Loyalty
Offering no-cost EMI options helps banks attract and retain customers by providing them with affordable financing solutions. Customers appreciate the flexibility and affordability of paying for products in installments, which can lead to repeat business and long-term relationships with the bank.
Conclusion
While the concept of no-cost EMI schemes may appear straightforward to consumers, banks employ a variety of strategies to profit from these offerings. Through MDR fees, processing charges, price adjustments, cross-selling initiatives, and customer loyalty programs, banks maximize their revenue while providing customers with the illusion of interest-free financing.