Is it good to take instant credit for buying online?



ICICI Bank Ltd has partnered with Paytm to provide instant credit to its customers who are buyers on the latter’s e-commerce platform. The product, called Paytm-ICICI Bank Postpaid, is currently available only to those customers of ICICI Bank who are on Paytm’s platform, but the bank may extend such instant lending to customers of large format e-commerce platforms as well, Anup Bagchi, executive director, ICICI Bank, told reporters in a teleconference.

How does it work?

While making a purchase on Paytm, the payment modes page will provide an option to ‘pay later’, which will direct you to this product. As of now, purchases between Rs3,000 and Rs10,000 on Paytm will have this option. Based on repayment history of consumers, ICICI Bank could extend this limit to Rs20,000. The purchases could include even everyday expenses like paying bills or booking tickets.

The instant credit will be based on a big data algorithm that assesses real-time credit of customers. The algorithm will use a combination of financial and digital behaviour of the customer including credit bureau check, purchase patterns and frequency of purchase to ascertain credit worthiness. “Based on this credit score, we will have a limit of up to Rs20,000. There will be a 45-day interest-free credit; beyond that an interest will be charged at 3% per month,” Bagchi said.

Arun Ramamurthy, founder, Credit Sudhaar, a credit advisory, said consumers must realize that not every transaction gets a 45-day interest-free period. This will depend on the date of purchase. The billing cycle will be from the 1st of each month and one needs to pay by 15th of the next month. So, if you make a purchase on the 30th of a month, you get about 15 days to pay for it, and not 45 days. If you buy after the billing cycle, you would get a 45-day period to make the payment. “While one would tend to gain marginally with an interest-free credit period, in the bigger scheme of things, such gains will not contribute to one’s finances to a great extent,” said Ramamurthy.

While this new product works similar to the way a credit card does, the bank is aiming to reach out to customers who may not have a credit history to be eligible for a credit card, such as employees in their first jobs.

“Largely, we feel that the people using this facility will not have a credit card, and it will be an impulse purchase. There are many customers who do not have a history to get large limits on credit cards, but they are still good customers who want to make a purchase,” said Bagchi.

If there is a spend of Rs100, for instance, a large part of it will be paid off but some part may get rolled over. “We will make some money in that rollover. It’s a game of probability,” said Bagchi.

At the same time, a Paytm customer who was not able to make a purchase due to lack of a credit line, will be able to make that purchase. “Because of extension of credit to their customers, Paytm’s sales will improve,” he said.

Mint Money take

Financial advisers emphasise on refraining from impulse purchases. Moreover, easy credit could also lead you into a debt-trap. “The ease of access to credit should be accompanied with the sense of being a responsible borrower. Similar to credit cards, where people can expose themselves to a much higher credit than they can manage, even here the consumers will need to refrain from overexposing themselves to credit,” said Ramamurthy.

While the bank is lending up to Rs20,000, a delayed payment would attract 3% interest per month, or 36% per annum. Plus, there will be a late payment fee of Rs50.

Should you use this? “One must realize that the spends have to be in line with income and be restricted to the budget for the product,” Ramamurthy said. However, it is not advisable to take credit for impulsive buys.

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