New home buyers often get confused about whether they should apply for a loan from a housing finance company (HFC) or a bank. The liquidity crisis brought about by the Covid-19 pandemic has hit the non-banking finance companies (NBFCs) hard. It has also raised concerns about the working style of these institutions and the impact of the same on home loan borrowers.
As per the union budget 2019-20, the central government passed over the charge of HFCs to the RBI. Since the crisis involving non-banking finance companies started to multiply, the government took away the charge from the National Housing Bank (NHB) although the housing finance companies (HFCs) are entities that are established under a license by the NHB. The HFCs will now have to follow the guidelines established by the banking regulator. Banks, on the other hand, are already under RBI regulation.
Here, we will explore both HFC and Banks as options for a home loan and help borrowers choose between the two.
Difference Between Home Loans from HFCs and Banks
The main difference between a bank and an HFC is the method of calculating the rate of interest. Banks have to follow RBI norms while calculating interest rate as they follow the repo rate-based lending rate for all kinds of loans. On the other hand, HFCs link the interest rate to the prime lending rate (PLR).
Banks are not allowed to lend at rates below the repo rate. However, there is no such norm on PLR-linked loans. Therefore, HFCs can set their PLRs. This allows sufficient freedom to HFCs as they can independently take decisions on loan rates at any time. However, this can result in more time for the rate cut impacts to reach the borrowers.
Make sure to check your home loan eligibility before applying for a home loan.
Liquidity Crisis in HFCs
The ongoing liquidity crisis that the HFCs are facing is mainly attributed to the asset-liability mismatch (ALM). Since HFCs are not allowed to raise capital through retail deposits from the general public, they are majorly dependent on wholesale lending. Thus, the cost of funds for HFCs is higher than banks. HFCs venturing into long-term loans to developers and long-term payment duration of underwriting loans are some of the mistakes that are aggravating the liquidity crisis.
Advantages and Demerits of HFCs and Banks
Here are some of the points that will help borrowers segregate the benefits and demerits of HFCs vs Banks:
- The best interest rates can be availed from a bank instead of an HFC.
- If a borrower’s credit score is not up to the mark or if he/she requires funds on an urgent basis, an HFC will be better suited for such requirements.
- If a borrower is looking to avail of banking services along with home loans, then, it makes sense to source a home loan from a bank.
- For housing loans, one can evaluate available options by comparing the fees along with facilities provided by the bank and HFCs.
It is always advisable to do some basic research and compare quotes, etc., before deciding on home loans. Compare various home loan schemes available in the Indian market and make a smart decision.
Should you Borrow from HFC or Bank?
A borrower’s decision to choose a particular home loan lender should be based on the financial strength and resilience displayed by the lender. This is irrespective of a bank or HFC. Strong players like HDFC, LIC Housing Finance, etc., are known to be well-established HFC companies. These can be compared with large banking institutions like SBI, ICICI Bank, etc. Borrowers need to choose a strong lender with well-established operations.
Here are some of the points to consider:
- Banks often transfer the RBI’s rate cut benefits immediately to borrowers. This is not true of HFCs.
- The interest rate will generally be higher in the case of HFCs.
- HFCs are often less strict as far as the documentation work is concerned. This makes it easier for self-employed individuals to secure a loan from HFCs.
Additional Reading: Learn how to improve your credit score.
Borrowers often prefer home loans from banks over Housing Finance Companies since the former are relatively cheaper than Housing Finance Companies. Banks also offer longer repayment tenure of up to 30 years, which is restricted to only 20 years in the case of HFCs.
However, for availing home loans from a bank, applicants must have a good credit score and employment stability. Banks are not very flexible in this regard as compared to HFCs. So, evaluate your eligibility criteria and choose the best home loan that fits your needs.
- Which home loan is better: bank or HFC?
Banks come under the RBI regulation and therefore, offer home loan interest rates as per the Marginal Cost of Lending Rate (MCLR). HFCs do not fall under the purview of the RBI and interest rates are based on the Prime Lending Rate (PLR). Banks pass on the benefit of interest rate reduction immediately to customers while HFCs often do not.
- Why are banks better than HFC?
HFCs attract high interest rates and involve other charges. Banks, however, provide low-interest rates and comparatively lower charges. Banks also provide overdraft facilities and cut the interest rates immediately as per MCLR. Therefore, banks are better than HFCs when it comes to home loans.
- Is HFC safe?
HFC deposits are often riskier than banks' and one must check the financials/ratings of the HFC before investing.
- What is the difference between banks & HFCs?
HFCs are similar to banks since they lend and make investments just like banks. Banks fall under the purview of RBI while HFCs do not. Banks use the repo rate set by the RBI while HFCs use the prime lending rate for determining loan interest rates.
- Is it good to take a home loan from HFC?
HFCs have flexible policies, however, interest rates are higher. While bank loans are linked to external benchmarks, HFC home loans are linked to the prime lending rate (PLR). HFCs have the liberty to set the PLR and this allows them greater freedom in deciding rates as per customer demands.