Whenever I used to visit any retail mobile shop or buy a mobile phone from amazon, I used to get shocked with this facility of Zero Cost EMI and often used to wonder, why would someone be so generous? The whole financial system has got built on the basic premises of vested interest and incentives and here we see one ‘God’s own child’ offering Zero Cost EMI. 

But is it really that true that someone is giving you something without charging anything in return? Well, ABSOLUTELY not!!

The e-commerce websites like Flipkart and Amazon India offer no cost EMI schemes with interest applicable, which is usually somewhere arounds 15 percent. These sites charge discount which is equal to the interest rate. Assume a customer wants to buy a smartphone worth Rs 30,000.

In case the customer chooses a three-month no cost EMI plan where the interest charged is 15 percent, they will have to pay Rs 4,500 as the interest amount. Now, in case the customer chooses to pay the whole amount up front, they will be able to purchase the device for Rs 25,500. But should they choose to pay through no cost EMI, they have to pay the full price i.e. Rs 30,000. In this case, the interest amount is paid to the financier bank and the rest of the amount to the retailer.

On products that are not shown as discounted, the interest amount is added to the price. In the above case, the Rs 30,000 smartphone brought through a 3-month no cost EMI offer will actually cost you 34,500, to be payable over three months. However, this method is not used anymore since RBI released a circular in 2013 banning no cost EMIs. According to the circular, banks can’t offer any no-cost EMI because “the interest element is often camouflaged and passed on to the customer in the form of processing fee

The e-commerce websites these days discount the product to the exact amount of interest, which brings the amount payable to the actual price of the product. And since no extra charge is levied over and above product price, it’s called no cost EMI.

Advantages of no cost EMI

There’s a reason why online merchants are offering no cost EMI in tie-ups with major banks in the country. Below are the advantages of no cost EMI

1. Ability to buy expensive utilities without having to pay upfront
2. Pay conveniently over few months
3. Flexibility to choose the tenure according to your budget every month
4. The ability to pay the same amount in installments helps in better budget planning

Disadvantages of no cost EMI

While the no cost EMI certainly is convenient and allows purchasing something that you need but can’t because of financial restrictions, it does come with its set of drawbacks. Let’s take a look.

1. Cost of paying EMIs is higher than paying upfront
2. You might have to pay a fixed non-refundable processing fee for the EMI
3. You will have to GST on interest payable
4. In case you return the product and get a refund, you will still end up losing money on interest
5. You may end up buying expensive utilities that you want but don’t need

Should you choose no cost EMI?

In case you are absolutely sure that you need the product you plan to buy through no cost EMI and will be able to pay EMI every month for the tenure, than yes, no cost EMI is a very convenient method to make the purchase. However, if you are not sure of the purchase and were considering it on an impulse, it makes no sense to pay more than what you could have in the first place.

In regional slang, it is said that “Jab ek Dukaan khuli ho, toh doosri dukan nahi kholni chahiye” which in english would translate as when you have one shop up and running, don’t open another one. However, this is something which can’t be applied to the startup scenario where you need ways and methods of raising more and more money from the venture capital while you are still not profitable even in the 7-8th year of business because of massive cash burn being done to acquire customers.

Perhaps this is the only logical explanation I could think of where Zomato acquired Blinkit for an all stock deal worth almost 4500 crores. 

This transaction has raised eyebrows of corporate governance watch dogs as earlier in the month of August 2021 only, Zomato paid over 750 crores to acquire a 9% stake in the company and even offered a loan of about Rs. 1,125 crores. This all stock deal means that Zomato stocks will now be valued at Rs. 71 and will issue about 62.9 crore shares giving rise to a massive dilution of about 8%. The stock has tumbled more than 14% in the last 2 days. 

If we have to calculate the enterprise value of Blinkit as an entity as a whole it will come down to this: 

Market Value of Stocks= 4500 crore 

Market value of Debt= 1125 (given by Zomato)+ 1875( available with blinkit to be used in funding their future losses. 

Adding both, we get an approximate value of 7500 crores is the value of the deal in reality for Zomato. 

Now the interesting question is, if the EV or enterprise value of company is 7500 crores only, then what was the point of paying 750 crores for acquiring a 9% equity stake earlier? Also, another fact which raises eyebrows is the husband wife angle between zomato and blinkit. 

Apparently cofounder of both these startups are married which wasn’t disclosed in the press release of zomato. 

Zomato is clearly looking for a way to transition into quick commerce by its acquisition and have a method of getting some money out of the hands of the investors by giving them a new bait as well as found some greenery in a new space as Corona has taught them about the limitations that food delivery business has and perhaps having a lifeguard in the form of blinkit is something that can be useful for them. 

This article is written by Nikhil Gupta, founder PoonjiMitra. 

Linkedin of PoonjiMitra: https://www.linkedin.com/company/poonjimitra

Linkedin of Nikhil Gupta (Founder): https://www.linkedin.com/in/nikhil-gupta-319584114/

Instagram of PoonjiMitra : https://www.instagram.com/poonji_mitra/

Instagram of Nikhil Gupta: https://www.instagram.com/nikhil_poonji/

Hence a society which has such a low foundational value of trust, financial institutions like banks seemed to have never lost their value. Even today we see people trusting bank FDs more than Mutual Funds or bonds or any other financial instrument and this is the reason we see so many organizations running to seek a banking license as soon as possible because that gives them quick credibility as well as license to all sorts of business in India. Nowadays, a bank is not just a bank. Bank is a depositor, creditor, broker, insurance agent, GST counselor-its almost everything under one roof. Adding to this is the safety net that you get for being a bank in India. You can literally get away with everything just because you are a bank and you need to  be protected in order to maintain the trust of the people in the banking system and financial system of this country. Eg: Yes bank and PSU bank recapitalisation

Hence this is too big an incentive which perhaps motivated one of the biggest private bank in the country to merge its entities finally into one single entity which is HDFC Bank. HDFC Limited will be merged into HDFC Bank. This big move will give the bank access to 9 million customers as well as grow its assets base to twice that of ICICI bank. Add to this is the low cost of raising funds for banks which HDFC is going to enjoy now after joining hands with HDFC banks. HDFC Bank is already the largest in terms of market capitalization and after the merger, it may be amongst top five-six banks globally. The merger action augments the ability to take big ticket loans and comes at a time when the capital investment is picking up. It is believed that such merger can trigger further more mergers into the banking system. 

Well, we might be seeing some frenzy banks and NBFCs merger in the coming times as well as banking sector consolidation. 

As the markets are falling, EPF investment has suddenly become the cynosure of everyone and equity markets have started bothering everyone. Little do they understand that, with the equity markets falling, so is the guaranteed return on investment in the EPF which has come down to a record low of 8.1% – lowest in 4 decades perhaps. 

But why is this happening ?

EPF was constituted way back in 1952 where they used to invest in government securities, state guaranteed bonds etc. With the onset of 2015, as the political scenario of the country was about to change, so did the economic scenario because the government decided to keep an equity exposure of about 5% which was eventually increased to 15%. Now the government is even mulling to increase it to 25% as well. 

But this doesn’t answer our initial question- why is the government reducing its guarantee?

The simple reason for the same lies in the fact that with EPFO also having equity exposure, guaranteed return has become a too big a promise for them and with this guaranteed thing looming over the government’s head, they are soon planning to reduce the rate of interest even further and we might see it soon come down even below 8% as well. Hence with every passing year, we see the disappointment and despair run down the eyes of the investor. 

Keeping view of the same, pure equity investment in general have fared well above the EPF investment keeping the same period of investment. 

Still want to invest in EPF ? 

Let us know in comment section!!