{"id":352,"date":"2020-07-11T08:01:45","date_gmt":"2020-07-11T08:01:45","guid":{"rendered":"https:\/\/www.loanfasttrack.com\/blog\/?p=352"},"modified":"2020-07-11T08:01:45","modified_gmt":"2020-07-11T08:01:45","slug":"why-home-loan-interest-rates-of-nbfcs-higher-than-banks","status":"publish","type":"post","link":"https:\/\/www.loanfasttrack.com\/blog\/blog\/finance\/why-home-loan-interest-rates-of-nbfcs-higher-than-banks\/","title":{"rendered":"Why Home Loan Interest Rates Of NBFCs Higher Than Banks"},"content":{"rendered":"\n
\"Why<\/figure>\n\n\n\n

\u201cHome-\nA dream house\u201d is one of the important shelter needs of human mankind. Everyone\ndreams to buy a house of their own, and this dream to own a house has made the\nhome loan segment to top the highest business in the loan industry. Initially\nit was banks – private banks, nationalized banks, scheduled banks &\nco-operative banks which were approached to get a housing loan. But gone are\nthe days when you had to stand in a line to get loans from the banks. With the\nadvent of NBFCs (Non-Banking Financial Companies) getting a loan has become\neasier due to its facilities such as easy accessibility, maximum funding,\nrelaxation on CIBIL scores and remote coverage. This has made NBFCs a more\npreferred choice for the loan applicants. Since it is a general rule that\nnothing comes free of cost, getting such considerations and relaxations might\ncost you extra in the form of higher processing fees or higher housing loan\ninterest rates or both. <\/p>\n\n\n\n

If\nyou are planning to apply for a housing loan you basically have two choices.\nEither you can apply with a bank or you can approach an NBFC. Applying with\neither has its own advantages and disadvantages. Although the interest rate\noffered is the primary factor of your comparison, parameters such as processing\ncharges, loan repayment, loan eligibility<\/strong><\/a>, repayment tenure, etc. are other\nequally important parameters for selecting your loan lender. Since home loan is\nyour long term financial commitment, it becomes more important to wisely choose\nbetween the both. <\/p>\n\n\n\n

Mr.\nBalkrishna decides to apply for a housing loan. To increase the chances for his\nloan approval, he further decides to apply with both bank and NBFC. Balakrishna\nis 50 years old with a CIBIL score of 650 and wants maximum funding. With\nmultiple rejections from the banks he finally got his loan approved from an\nNBFC, but was surprisingly shocked to check the applicable charges and housing\nloan interest rates. Although the interest rates charged were higher he was\nhappy because he could now finally purchase a home for his family. <\/p>\n\n\n\n

Compare Home Loan Interest Rates of Top Banks &\nNBFC<\/strong><\/a><\/strong><\/p>\n\n\n\n

Why NBFCs Charge High Interest Rates? <\/strong><\/h3>\n\n\n\n

It is\ncommonly observed that the home loan interest rates of NBFCs are comparatively\nhigh. However the NBFCs cannot offer interest rates higher than the ceiling\nrate prescribed by RBI from time to time. The present ceiling is 12.5 per cent\nper annum. We have observed the following reasons for its high home loan\ninterest rates.<\/p>\n\n\n\n

1) Funds Sources To Lend The Loan <\/strong><\/p>\n\n\n\n

NBFCs\nare not banks, they do not have banking license and therefore they cannot\naccept deposits from the public. They therefore raise the funds through\nborrowings from banks as term loans and from FDI and by selling commercial\npapers to mutual funds or by selling 6 months debt papers. The interest rates\nthey charge for housing loans are therefore high to cover their borrowing costs\ni.e. the cost of borrowings + the spread (profit margins) which is their\nlending rate for housing loans. <\/p>\n\n\n\n

However\nthere are NBFCs which are entitled to accept public deposits, such as the NBFCs\nwith specific authorization from RBI and having investment grade rating can\naccept\/ hold public deposits to a limit of 1.5 times of its Net Owned Funds.\n‘Net Owned Fund’ are owned funds minus the amount of investments of such\ncompany in shares of its subsidiaries, companies in the same group and all\nother NBFCs and the book value of debentures, bonds, outstanding loans and\nadvances including hire purchase and lease finance made to and deposits with\nsubsidiaries and companies in the same group, to the extent it exceeds 10% of\nthe owned fund. (\u2018Owned Fund\u2019- means aggregate of the paid-up equity capital,\npreference shares which are compulsorily convertible into equity, free\nreserves, balance in share premium account and capital reserves representing\nsurplus arising out of sale proceeds of asset, excluding reserves created by\nrevaluation of asset, after deducting therefrom accumulated balance of loss,\ndeferred revenue expenditure and other intangible assets.) NBFCs in Mumbai that\nare allowed to accept public deposits include Bajaj Finance Ltd., Mahindra\n& Mahindra Financial Services Ltd., etc. (Ref. RBI.org)<\/p>\n\n\n\n

So at\ntimes, when you apply with these NBFCs which accept deposits you might enjoy\nthe interest rates similar to the banks housing loan interest rates. In many cases interest rates offered\nby NBFCs are lower when compared to rates offered by banks but only for cases\nthat fulfills the pre-conditions that are- clear profile, regular flow\nof income, good CIBIL scores, etc.  <\/p>\n\n\n\n

2) Non Availability Of Overdraft Facility<\/strong><\/p>\n\n\n\n

NBFCs\ndo not offer overdraft facility with its home loan products. In an overdraft\nfacility your home loan is linked to your account where you can park your\nsurplus funds which help to reduce the interest liability on your home loan.\nSince NBFCs do not perform banking activity they cannot provide the overdraft\nfacility and hence their interest payable remains high. <\/p>\n\n\n\n

3) Higher Loan Eligibility<\/strong><\/p>\n\n\n\n

NBFCs\ncan include stamp duty and registration as a part of the market value of the\nproperty, which is generally not considered by the bank. As a result, according\nto the applicable LTV percentage loan eligibility<\/strong><\/a> will be higher with NBFCs in\ncomparison to the banks. For example, if the market value of the property is\n50lakhs, applicable stamp duty and registration is approx. 3lacs & LTV is\n80%, the loan eligibility will be calculated as under<\/p>\n\n\n\n

With\nNBFCs – 53lakhs (50lakhs+3lakhs) X 80 % which is 42.40lakhs <\/p>\n\n\n\n

With\nbanks will be 50lakhs X 80% that is 40lakhs. <\/p>\n\n\n\n

Since\nNBFCs provide you with higher loan eligibility to match your home loan\nrequirement, they therefore charge you with high interest rates.<\/p>\n\n\n\n

Suggested\nRead: What Do You Mean By Loan Eligibility In Home Loan?<\/strong><\/a><\/strong><\/p>\n\n\n\n

4) Relaxations on CIBIL Credit Score<\/strong><\/p>\n\n\n\n

NBFCs\nare comparatively less stringent on the credit score as compared to banks which\nhave stringent norms of\ncredit score of 750 & above to get home loans at attractive interest rates.\nSince NBFCs have more relaxed policies with credit scores, applicants with low\ncredit scores or applicants of low income segment or informal segments who\ndon\u2019t have any credit history, can also apply for housing loan with NBFCs. And\ntherefore the interest rates charged by NBFCs are higher. <\/p>\n\n\n\n

5) Minimum\nDocumentation And Faster Process<\/strong><\/p>\n\n\n\n

NBFCs have simpler documentation and\nfaster turnaround time for loan processing. They have a less stringent\ndocumentation process as compared to the banks which means that there are\nhigher chances of getting your loan approved. Although banks are more reliable,\nNBFCs offer you more flexibility and services, improving your chances of loan\napproval which is usually compensated by charging higher interest rates. <\/p>\n\n\n\n

6) Passing\nOn The Benefits Interest Rates<\/strong><\/p>\n\n\n\n

The bank’s interest rates are based on\nthe repo rates of RBI. Any fluctuations in the repo rates will have a direct\nimpact on the interest rates of the banks and banks have to reduce their rate\nof interest in case the RBI alters the repo rate. While on other hand, NBFCs\nare free to set their own rates of interest. Since banks mandatorily have to\npass on the benefits of the interest rates to their borrowers, NBFCs are not\nrequired to do so because their interest rates are linked to benchmark prime\nlending rates or RPLR. Therefore there is always a differentiation in the\ninterest rates of the both, NBFCs interest rates are high become they remain\nunchanged while the interest rates for the banks are low as they pass on the\nbenefits of the reduced rates to its borrowers.<\/p>\n\n\n\n

To secure a low interest rate home\nloan <\/strong>Click<\/strong><\/a>. <\/p>\n\n\n\n

7) Target\nCustomers<\/strong><\/p>\n\n\n\n

NBFCs generally\ncater to niche customers who are not easily serviced by banks, that includes\nthe low income segment or informal segments having no credit history, or\ncustomers with low credit scores. Therefore the interest rates of NBFCs are\nhigh. <\/p>\n\n\n\n

Even though with the slowdown\nin the current number of NBFCs they still account for almost 40% of the home\nloan market.  <\/p>\n\n\n\n

Difference\nBetween Banks And NBFCs<\/strong><\/h2>\n\n\n\n
\n SR. NO.<\/strong>\n <\/td>\n FEATURES<\/strong>\n <\/td>\n NBFC<\/strong>\n <\/td>\n BANK<\/strong>\n <\/td><\/tr>
\n 1\n <\/td>\n Services\n Offered\n <\/td>\n Chiefly\n loans.\n <\/td>\n All\n banking services.\n <\/td><\/tr>
\n 2\n <\/td>\n Types\n Of Loan\n <\/td>\n Offers\n specialized mono-line product i.e. home loan.\n <\/td>\n Offers\n personal loan, auto loan and home loan.\n <\/td><\/tr>
\n 3\n <\/td>\n Regulatory\n Authority\n <\/td>\n NHB\n (National Housing Bank)\n <\/td>\n RBI\n (Reserve Bank Of India)\n <\/td><\/tr>
\n  \n <\/td>\n Regulated\n By\n <\/td>\n Companies\n Act, 2013.\n <\/td>\n Banking\n Regulation Act, 1949.\n <\/td><\/tr>
\n 4\n <\/td>\n Source\n Of Fund To Lend\n <\/td>\n Borrowings\n from banks & FDI, selling commercial papers to mutual\n funds.\n <\/td>\n Deposits\n from customers.\n <\/td><\/tr>
\n 5\n <\/td>\n Lending\n Rates Based On\n <\/td>\n RPLR\n (Retail Prime Lending Rate).\n <\/td>\n Repo\n Rate.\n <\/td><\/tr>
\n 6\n <\/td>\n Interest\n Rates\n <\/td>\n Comparatively\n higher than banks.\n <\/td>\n Comparatively\n lower than NBFCs.\n <\/td><\/tr>
\n  \n <\/td>\n  \n <\/td>\n Depends\n on the applicant\u2019s profile, income, property, CIBIL scores, etc.\n <\/td>\n It is\n usually a fixed range of interest rate for all applicants.\n <\/td><\/tr>
\n  \n <\/td>\n  \n <\/td>\n 8.30%-12.50%\n <\/td>\n 6.90%-10%\n <\/td><\/tr>
\n  7\n <\/td>\n Interest\n Rate Benefits\n <\/td>\n Slower\n in passing the benefits to the borrowers.\n <\/td>\n Quick\n in passing the benefits to the borrowers.\n <\/td><\/tr>
\n 8\n <\/td>\n Documentation\n Process\n <\/td>\n Less\n stringent \n <\/td>\n Stringent\n \n <\/td><\/tr>
\n 9\n <\/td>\n Loan\n Approvals \n <\/td>\n Comparatively\n easier\n <\/td>\n Comparatively\n strict.\n <\/td><\/tr>
\n 10\n <\/td>\n Turnaround\n Time \n <\/td>\n Faster\n disbursement.\n <\/td>\n Usually\n slow disbursement.\n <\/td><\/tr>
\n 11\n <\/td>\n Overdraft\n Facility \n <\/td>\n Not\n available.\n <\/td>\n Available\n with selected banks. \n <\/td><\/tr>
\n 12\n <\/td>\n Eligibility\n <\/td>\n Higher\n than banks.\n <\/td>\n Comparatively\n lower than NBFCs.\n <\/td><\/tr>
\n  13\n <\/td>\n CIBIL\n Score\n <\/td>\n Relaxation\n on CIBIL scores.\n <\/td>\n Mandatory\n CIBIL score of 750 & above.\n <\/td><\/tr><\/tbody><\/table>\n\n\n\n

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\u221a To find the <\/a>best bank for home loan<\/strong><\/a><\/strong><\/p>\n\n\n\n

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\u221a To get an <\/a>instant\nloan in Mumbai<\/strong><\/a><\/strong><\/p>\n\n\n\n

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\u221a To get assured\nlow interest rates for <\/a>loan\nagainst property in Mumbai<\/strong><\/a><\/p>\n\n\n\n

Additional Read<\/strong>:<\/p>\n\n\n\n