How would you like to go shopping without worrying about the balance in your bank account? Wouldn’t you be thrilled if the retailer loaned you the money to shop at their store? Yes, that is the latest move by retailers to boost their sales! Will this system catch on in India?
The consumer goods industry has undergone a sea change. A shopping trip is very different today from what it was ten years ago. Branded commodities, large shopping malls, corporate players and the influence of the West have completely revolutionized our shopping experience!
Shopping the way the West does
The latest development in the retail industry is that instead of banks, retailers themselves will offer loans to their consumers. This practice is already followed in the US and other countries, where retail chains like JC Penney, Macys, Circuit City and others extend ‘store credit’ to their customers. These department stores offer credit cards to their customers to enable them to shop now and pay later! This also saves customers the trouble of getting a consumer loan from a bank.
Retail chains in India too are turning to this avenue to encourage consumer spending. Pantaloon and Big Bazaar are among the first retail stores to loan money to their customers to shop from their stores. It’s early days yet to say whether this will become a popular trend in India.
Who foots the bill?
The system of retail stores extending loans to their consumers creates a win-win situation. It increases sales as consumers who are short of cash can also purchase goods from the retailer and pay their dues later. It also boosts impulse spending– something retailers always encourage. Consumers, on the other hand, do not have to plan their purchases ahead of time or restrict themselves to a budget, enjoying the freedom to splurge whenever they want. They also do not have to go through the complicated process of getting a bank loan, as retailers are only too keen to facilitate in-house credit.
The practice is not without vices though. In the West, people have a reliable credit history, which the retailer can easily access and assess before offering a loan. This is not an option for stores in India. Also, the legal system is more stringent and delivers faster results in these countries. Retail chains in India will not have ready recourse to the law in case of default – and might end up, like banks have done, using the strong-arm tactics of ‘recovery agents’.
Consumers should read the fine print and be aware of penalties that retailers might impose if they default on payments. Also, the interest rates on retailers’ loans are high so you would end up paying more than an item is worth, if you buy it using credit from the store.
Will the practice of retailers extending loans to their customers work in India? Do you foresee any problems in implementing such a system? Will it affect the business of banks in India?
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