When opting for a home loan, borrowers are often in a dilemma over whether to opt for a housing finance company or bank. We examine the advantages and disadvantages of both, to help home buyers make an informed decision.
Housing Finance Companies (HFCs) are entities set up under a license by the National Housing Board (NHB), to provide home loans as per the NHB’s guidelines. On the other hand, banks are regulated by the Reserve Bank of India (RBI). New home buyers are often in a dilemma, over whether they should apply for a loan from an HFC or a bank. The recent liquidity crisis being faced by non-banking finance companies (NBFCs), has also raised serious doubts about their working style and people are concerned about its impact on their home loans.
Difference between home loans from HFCs and banks
The primary difference between a bank and an NBFC/HFC is the way they calculate the rate of interest. Banks are mandated by the RBI, to follow the marginal cost of funds-based lending rate (MCLR) for all loans after April 2016. For example, for a Home loan of up to Rs 30 lakhs, a leading bank may have a spread of 35-40 basis points above its one-year MCLR of 8.35 per cent. The interest rate in an MCLR-linked loan, will automatically change at fixed intervals that are clearly mentioned. On the other hand, loans by HFCs and NBFCs are linked to the prime lending rate (PLR).
While banks cannot lend at rates below the MCLR, there is no such restriction on PLR-linked loans. HFCs and NBFCs are free to set their PLRs. This gives greater freedom to NBFCs, to increase or decrease their loan rates as per their requirements. However, this also means that it would take more time for the impact of rate cuts to reach the customers.
Impact of the liquidity crisis in NBFCs
NBFCs are not allowed to raise retail deposits from the general public, they depend on wholesale lending, for their capital requirement. As a result, the cost of funds for NBFCs, is higher than that of banks. The major mistake that most of the NBFCs and HFCs did, was to venture into long-term lending to developers and underwriting loans that had a very long-term payment duration.
Experts point out that companies with high credit ratings, have not had a problem and have been able to maintain their assets and liabilities. However due to liquidity requirements, if the debt facilities extended to HFCs are sold or discounted, albeit at higher rates, it may trigger a domino effect. While the asset quality and financial strength of the HFC or NBFC may be intact, the need to provide for repayment of short-term loans, can lead to a shutdown in operations, thereby, further spooking the capital markets. HFCs are then forced to sell down their loan assets, recall short-term loans, conserve cash and repay their short-term loan obligations.
Advantages and disadvantages of HFCs and banks
Both HFCs and banks have their advantages and disadvantages. For instance, if you want to enjoy the best interest rates, then, a bank could be a better option. However, if your credit score is dented or if you need funds on an urgent basis, then an NBFC could be better suited for that requirement. Also, it depends on the type of services sought to be availed. If banking services are required along with Home loans, then, the choice has to be a bank. If it is only a housing loan, then you can evaluate your options by comparing associated charges and facilities provided the bank and HFC players. Either way, it is best to do your homework and compare quotes, etc., before making the final decision.
Should you choose a NBFC or a bank?
The decision to opt for a particular home loan lender, should be based on the resilience and financial strength of the lender, irrespective of whether it is a bank or NBFC/HFC. “Long-standing players like HDFC, LIC Housing Finance, etc., are stable NBFC/ HFC companies, which compare with large banking players like SBI, ICICI Bank, etc. Hence, choosing a strong lender with deep-rooted history and operations, is the key in today’s times,” he concludes.