“Home- A dream house” is one of the important shelter needs of human mankind. Everyone dreams to buy a house of their own, and this dream to own a house has made the home loan segment to top the highest business in the loan industry. Initially it was banks – private banks, nationalized banks, scheduled banks & co-operative banks which were approached to get a housing loan. But gone are the days when you had to stand in a line to get loans from the banks. With the advent of NBFCs (Non-Banking Financial Companies) getting a loan has become easier due to its facilities such as easy accessibility, maximum funding, relaxation on CIBIL scores and remote coverage. This has made NBFCs a more preferred choice for the loan applicants. Since it is a general rule that nothing comes free of cost, getting such considerations and relaxations might cost you extra in the form of higher processing fees or higher housing loan interest rates or both.
If you are planning to apply for a housing loan you basically have two choices. Either you can apply with a bank or you can approach an NBFC. Applying with either has its own advantages and disadvantages. Although the interest rate offered is the primary factor of your comparison, parameters such as processing charges, loan repayment, loan eligibility, repayment tenure, etc. are other equally important parameters for selecting your loan lender. Since home loan is your long term financial commitment, it becomes more important to wisely choose between the both.
Mr. Balkrishna decides to apply for a housing loan. To increase the chances for his loan approval, he further decides to apply with both bank and NBFC. Balakrishna is 50 years old with a CIBIL score of 650 and wants maximum funding. With multiple rejections from the banks he finally got his loan approved from an NBFC, but was surprisingly shocked to check the applicable charges and housing loan interest rates. Although the interest rates charged were higher he was happy because he could now finally purchase a home for his family.
Why NBFCs Charge High Interest Rates?
It is commonly observed that the home loan interest rates of NBFCs are comparatively high. However the NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is 12.5 per cent per annum. We have observed the following reasons for its high home loan interest rates.
1) Funds Sources To Lend The Loan
NBFCs are not banks, they do not have banking license and therefore they cannot accept deposits from the public. They therefore raise the funds through borrowings from banks as term loans and from FDI and by selling commercial papers to mutual funds or by selling 6 months debt papers. The interest rates they charge for housing loans are therefore high to cover their borrowing costs i.e. the cost of borrowings + the spread (profit margins) which is their lending rate for housing loans.
However there are NBFCs which are entitled to accept public deposits, such as the NBFCs with specific authorization from RBI and having investment grade rating can accept/ hold public deposits to a limit of 1.5 times of its Net Owned Funds. ‘Net Owned Fund’ are owned funds minus the amount of investments of such company in shares of its subsidiaries, companies in the same group and all other NBFCs and the book value of debentures, bonds, outstanding loans and advances including hire purchase and lease finance made to and deposits with subsidiaries and companies in the same group, to the extent it exceeds 10% of the owned fund. (‘Owned Fund’- means aggregate of the paid-up equity capital, preference shares which are compulsorily convertible into equity, free reserves, balance in share premium account and capital reserves representing surplus arising out of sale proceeds of asset, excluding reserves created by revaluation of asset, after deducting therefrom accumulated balance of loss, deferred revenue expenditure and other intangible assets.) NBFCs in Mumbai that are allowed to accept public deposits include Bajaj Finance Ltd., Mahindra & Mahindra Financial Services Ltd., etc. (Ref. RBI.org)
So at times, when you apply with these NBFCs which accept deposits you might enjoy the interest rates similar to the banks housing loan interest rates. In many cases interest rates offered by NBFCs are lower when compared to rates offered by banks but only for cases that fulfills the pre-conditions that are- clear profile, regular flow of income, good CIBIL scores, etc.
2) Non Availability Of Overdraft Facility
NBFCs do not offer overdraft facility with its home loan products. In an overdraft facility your home loan is linked to your account where you can park your surplus funds which help to reduce the interest liability on your home loan. Since NBFCs do not perform banking activity they cannot provide the overdraft facility and hence their interest payable remains high.
3) Higher Loan Eligibility
NBFCs can include stamp duty and registration as a part of the market value of the property, which is generally not considered by the bank. As a result, according to the applicable LTV percentage loan eligibility will be higher with NBFCs in comparison to the banks. For example, if the market value of the property is 50lakhs, applicable stamp duty and registration is approx. 3lacs & LTV is 80%, the loan eligibility will be calculated as under
With NBFCs – 53lakhs (50lakhs+3lakhs) X 80 % which is 42.40lakhs
With banks will be 50lakhs X 80% that is 40lakhs.
Since NBFCs provide you with higher loan eligibility to match your home loan requirement, they therefore charge you with high interest rates.
Suggested Read: What Do You Mean By Loan Eligibility In Home Loan?
4) Relaxations on CIBIL Credit Score
NBFCs are comparatively less stringent on the credit score as compared to banks which have stringent norms of credit score of 750 & above to get home loans at attractive interest rates. Since NBFCs have more relaxed policies with credit scores, applicants with low credit scores or applicants of low income segment or informal segments who don’t have any credit history, can also apply for housing loan with NBFCs. And therefore the interest rates charged by NBFCs are higher.
5) Minimum Documentation And Faster Process
NBFCs have simpler documentation and faster turnaround time for loan processing. They have a less stringent documentation process as compared to the banks which means that there are higher chances of getting your loan approved. Although banks are more reliable, NBFCs offer you more flexibility and services, improving your chances of loan approval which is usually compensated by charging higher interest rates.
6) Passing On The Benefits Interest Rates
The bank’s interest rates are based on the repo rates of RBI. Any fluctuations in the repo rates will have a direct impact on the interest rates of the banks and banks have to reduce their rate of interest in case the RBI alters the repo rate. While on other hand, NBFCs are free to set their own rates of interest. Since banks mandatorily have to pass on the benefits of the interest rates to their borrowers, NBFCs are not required to do so because their interest rates are linked to benchmark prime lending rates or RPLR. Therefore there is always a differentiation in the interest rates of the both, NBFCs interest rates are high become they remain unchanged while the interest rates for the banks are low as they pass on the benefits of the reduced rates to its borrowers.
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7) Target Customers
NBFCs generally cater to niche customers who are not easily serviced by banks, that includes the low income segment or informal segments having no credit history, or customers with low credit scores. Therefore the interest rates of NBFCs are high.
Even though with the slowdown in the current number of NBFCs they still account for almost 40% of the home loan market.
Difference Between Banks And NBFCs
|1||Services Offered||Chiefly loans.||All banking services.|
|2||Types Of Loan||Offers specialized mono-line product i.e. home loan.||Offers personal loan, auto loan and home loan.|
|3||Regulatory Authority||NHB (National Housing Bank)||RBI (Reserve Bank Of India)|
|Regulated By||Companies Act, 2013.||Banking Regulation Act, 1949.|
|4||Source Of Fund To Lend||Borrowings from banks & FDI, selling commercial papers to mutual funds.||Deposits from customers.|
|5||Lending Rates Based On||RPLR (Retail Prime Lending Rate).||Repo Rate.|
|6||Interest Rates||Comparatively higher than banks.||Comparatively lower than NBFCs.|
|Depends on the applicant’s profile, income, property, CIBIL scores, etc.||It is usually a fixed range of interest rate for all applicants.|
|7||Interest Rate Benefits||Slower in passing the benefits to the borrowers.||Quick in passing the benefits to the borrowers.|
|8||Documentation Process||Less stringent||Stringent|
|9||Loan Approvals||Comparatively easier||Comparatively strict.|
|10||Turnaround Time||Faster disbursement.||Usually slow disbursement.|
|11||Overdraft Facility||Not available.||Available with selected banks.|
|12||Eligibility||Higher than banks.||Comparatively lower than NBFCs.|
|13||CIBIL Score||Relaxation on CIBIL scores.||Mandatory CIBIL score of 750 & above.|
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