When it comes to securing a home loan, you may be faced with the quintessential dilemma of whether to go for a bank or a housing finance company (HFC).
The housing finance market is ostensibly rooted in a model of duality, with banks and HFCs both serving as major lenders to prospective homeowners. HFCs are licensed corporations, governed by the National Housing Board (NHB), whereas banks come under the purview of the Reserve Bank of India (RBI).
After finalising a property, many homeowners resort to securing a home loan to fund their investment, but flounder when it comes to choosing a lender. Typically, whether a buyer decides to go for a bank (public or private) or an HFC, the chief considerations include eligibility cutoffs, processing fees and prevailing interest rates. The recent liquidity crisis faced by non-banking finance companies (NBFCs) has also cast a shadow of gloom over HFCs, with many buyers concerned about its impact on home loans. If you’ve been deliberating between a bank and an HFC, this comparison should help.
The Difference Between Banks and HFCs
Banks and HFCs primarily differ in two ways, each outlined below.
Since banks are overseen by the RBI, they institute the marginal cost of funds-based lending rate (MCLR) for all home loans. The associated interest rate of an MCLR loan fluctuates over time. HFCs, however, offer a prime lending rate (PLR) on loans. While banks are not allowed to lend below the MCLR rates, HFCs face no such constraint, and are free to offer loans at independently set rates above or below the PLR. However, interest rate benefits of HFCs are slow to get passed on to borrowers, whereas banks under the MCLR model can pass on rate cuts swiftly.
Concern over spiralling non-performing assets (NPAs) in recent years has led banks to tighten their norms for lending. Revised mandates now involve the submission of several documents. HFCs, in contrast, require fewer documents for loan processing, and thus, disburse loans within a shorter turnaround time. The liquidity crisis, however, has now forced HFCs to introduce stringent regulations around loan disbursements.
The Pros & Cons of Banks and HFCs
Both banks and HFCs offer value to home buyers. Banks are often favoured for offering better interest rates, while HFCs are considered the go-to for buyers with an unfavourable credit score or who need immediate access to funds. Additionally, for home buyers who need auxiliary banking services in conjunction with their loan, a bank may be a wise choice over an HFC. If purely loan services are sought, banks and HFCs can be evaluated at par to see which has better facilities and more economical charges.
Choosing Between a Bank and an HFC
Deciding between a bank and an HFC should pivot not on the type of home loan lender, but on the financial soundness and strength of the bank or HFC. There are many HFCs and NBFCs in the Indian lending realm today, including HDFC, LIC Housing Finance and more, that are on an equal playing field to well-known banks.
Therefore, declaring a winner between the two isn’t justified. While earlier, high interest rates from HFCs put banks at a natural advantage, interest rates have now more or less equalised, making both types of borrowing equally viable.