Who dies in the game of ‘Differentiate or Die’…?


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With leisurely sips of cuppa tea on a lovely winter afternoon in the balcony where the treat of the sun had a soothing effect, I was looking at some routine business magazines. So when the doorbell interrupted my feast, I was reluctant to greet the guest. There was a courier-boy to deliver my monthly credit card statement that for known reasons is always painful and pesky. Carrying it along, I jumped back to an interesting article that I was reading before the doorbell rang.

This article critically remarked the noose tightening around the ‘teaser rate’ loan products of few private sector banks by the Reserve Bank of India (RBI). Teaser rate is a special loan scheme under which a concessional rate is offered for a limited period to attract customers. Because of its obvious attraction, this product was doing fairly good by serving its very design purpose.

The RBI had in its policy review meeting last month voiced concern over the high risk of default on loans offered at teaser rates. This is a classic example of what I refer as product-design differentiation. The financial masterminds often come up with many such ‘conditions apply’ products.

Completing the article, unreceptively I proceeded to open my credit card statement envelop. Before the statement could actually put me out, there slipped a leaflet displaying a pictorial of a man with rejoicing expressions and text in eye catching fonts size, ‘CASH! CASH! CASH! Rs. 1,31,000 @ just 9%’, which was obviously attractive even though I was not in that urgent need of money. This offer kept me wondering as to what has led to this overnight increase in my creditworthiness and was about to brush my collars up and carry some air beneath, which I usually do not because it being beyond my affordability,  I thought of taking a suspicious stand first and dug out the details.

It required me to pay Rs. 4,622 p.m. for 36 months with a one-time processing fee of Rs. 1,500 to be paid at the time of obtaining the so called loan. It had a * marked as conditions apply, need less to say in the tiniest most possible font size which demands a full syringe of vitamin A to actually locate it in its correct form.

Upon further inquiry, which was more out of curiosity than willingness to take the offer, I found that along with the EMI a service tax of Rs. 104 per month on an average, as mentioned by the official call attendant, was also to be paid.

Now it was time to calculate the effective rate that would bleed me out if I accept the delicious looking CASH.

A simple computation unveiled the horrifying truth. The monthly rate of interest paid effectively was 1.55791% which comes to a soaring 18.7% p.a.

As they say, it’s hard to improve ones perfection, a recheck was obvious from my end. By discounting these cash flows at the stated 9% (0.75% monthly) the present values were calculated treating these as investment outflows instead of repayments. The present values had to be greater than Rs. 1,31,000 being offered. Shocking!!!!

With inflation rate and opportunity cost of investment at current levels this 18.7% is nothing better than chopping off the customer head who actually is a poor victim a applauding differentiated product design.

But this differentiation seems to be the only sledge hammer in the race of meeting business targets. Not to blame the front-end who is pitching these to customers. And furthermore, one might not label them as amoral for the reason that all possible intricacies are disclosed in the offer.

In my opinion, if RBI can proscribe such ‘teaser’ loan products why it fails to acknowledge the even deeper wounding loan offers by banks to its credit card customers.

Literacy in these areas demands urgent attention from us. Areas are countless but this can be a stepping stone to our movement of investors’ awareness.

Please extend your educating hand to possible beneficiaries.