Understanding the Manufacturer Cashback or Interest ‘Subvention’.

The Brands or Manufacturer/OEMs (original equipment manufacturer) bear the interest cost for EMI on specific tenures and on select products / models. This interest cost borne by OEMs in the form of ‘Manufacturer cashback’ (displayed in EMI chargeslip as well ) is called Interest Subvention. This is called Merchant Interest Bearing and is presented to customers as ‘Manufacturer cashback’ in chargeslips. This is also, for ease of customer understanding, called as ‘No Cost EMI’. An example is illustrated below:

A Transaction Amount 35,000
B Tenure (in months) 6
C Rate of Interest (%) 14%
D Manufacturer Cashback (%) 3.96%
E Manufacturer Cashback (Rs) 1,386
F Booking Amount (Rs) - (A-E) 33,614
G EMI (calculated on Booking Amt) 5,833
H Total Amt over EMI booking tenure (EMI*Tenure) 35,000
I Total Interest (Rs) - (H-F) 1,386


In the above-mentioned example, Customer makes a transaction of Rs.35000 (A) at the merchant and opts for a 6 month EMI (B). On 6 month tenure with the rate of interest on monthly reducing balance, the effective interest on the principle amount should be 3.96% (D). Considering, there is complete Interest subvention on this purchase, the customer receives a Manufacturer Cashback of 3.96% of the transacted amount or Rs.1386 (E). The final Loan booking amount or the amount on which interest for EMI would be calculated will be Rs. 35000 - 1386 = Rs.33614 (F). Manufacturer cashback equivalent to interest levied amount is credited / adjusted upfront and then the EMIs are debited over the tenure of the loan with the applicable rate of interest. The EMI per month (F) for 6 month tenure with 14% rate of interest on monthly reducing balance comes to as Rs.5833 (G). Thus even after EMI, the total cost to customer for the purchased product comes to be as Rs. 35000 (H).
Ultimately, the customer pays the amount equal to the principle transaction amount only. Therefore, it is also sometimes promoted as ‘No Cost EMI’. However due to RBI guidelines on usage of this term, SBI Card does not promote this as ‘No Cost’.