One of the biggest points of negotiation between banks and brands during EMI offers is the **tenure** of the EMI. Brands usually push for shorter tenures like 3 months, while banks strongly prefer longer tenures such as 6 months, 9 months, or even 12 months.
Why does this difference exist? Let’s understand this from a bank’s strategic perspective.
Why Do Banks Prefer Longer EMI Tenures?
Banks don’t just look at sales volume. They evaluate EMI offers based on profitability, risk, customer behavior, and long-term value. Longer EMI tenures give banks several advantages that shorter tenures don’t.
1. Better IRR (Internal Rate of Return)
IRR is one of the most important metrics for banks when evaluating EMI offers. Longer tenure EMI usually gives banks a better IRR because the interest is spread over more months. Even in No Cost EMI schemes (where the brand pays subvention), longer tenures help banks recover their cost of funds more effectively.
2. Higher Customer Stickiness
When a customer takes a 9-month or 12-month EMI, they remain engaged with the bank for a longer period. This increases the chances of cross-selling other products like personal loans, insurance, or credit cards. A 3-month EMI ends too quickly, and the customer may become inactive again.
3. Lower Risk of Early Closure
Customers who take shorter EMI tenures (like 3 months) are more likely to close the EMI early by paying the full amount in one go. This reduces the bank’s expected interest income and overall profitability from the offer.
4. Better Portfolio Quality
Longer EMI tenures help banks spread their risk. A customer paying over 9–12 months is generally considered more committed than someone paying in just 3 months. This improves the overall quality of the bank’s EMI portfolio.
Why Do Brands Prefer Shorter EMI Tenures?
From a brand’s point of view, shorter EMI tenures (especially 3 months) have clear advantages:
- Lower subvention cost — Brands have to pay less discount to the bank/NBFC for shorter tenures.
- Faster customer ownership — Customers feel they have paid off the product quickly.
- Higher conversion during sales — Many customers prefer finishing payments in 3 months rather than being committed for 9–12 months.
Example:
A brand may be willing to give higher subvention for a 3-month No Cost EMI because the overall cost is lower compared to a 9-month EMI. However, the bank may not find the 3-month offer attractive enough due to lower IRR and shorter customer engagement.
The Core Conflict Between Banks and Brands
This creates a natural conflict during offer negotiations:
| Factor | Bank’s Preference | Brand’s Preference |
|---|---|---|
| EMI Tenure | 6 months and above | 3 months or less |
| Subvention Cost | Wants lower cost | Willing to pay more for shorter tenure |
| Customer Engagement | Longer is better | Shorter is preferred |
| IRR Focus | High priority | Low priority |
How Banks Handle the Tenure Negotiation
Experienced banks usually follow these strategies during offer discussions:
- They push for a minimum tenure of 6 months in most EMI offers.
- They offer better commercial terms (lower subvention share) to brands if the brand agrees to longer tenures.
- They sometimes create different offers — for example, 3-month EMI with higher subvention from the brand, and 6+ month EMI with lower subvention.
- They use data to show brands that longer tenure offers actually drive better overall sales and customer retention.
How EMI Tenure Affects Offer Efficiency
Longer EMI tenures generally improve offer efficiency for banks because:
- The bank earns better returns over time.
- Customer engagement is longer, leading to higher lifetime value.
- The cost of acquiring and servicing the customer gets spread over more months.
This is why many banks are now reluctant to participate in very short EMI tenures unless the brand is ready to bear a higher share of the subvention cost.
Key Takeaway
Banks prefer 6+ month EMI offers because they deliver better IRR, longer customer engagement, lower risk of early closure, and improved portfolio quality. On the other hand, brands prefer shorter tenures (like 3 months) to reduce subvention costs and improve immediate conversion. This difference in priorities often becomes a key negotiation point between banks and brands during EMI offer discussions.
Note: In the next lesson, we will understand the complete role of Payment Aggregators, Payment Gateways, and Orchestrators in modern bank-brand partnerships.
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