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New home buyers are often in a dilemma, over whether they should apply for a loan from a housing finance company (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.
It is pertinent to note that in the union budget 2019-20, the central government handed over the charge of HFCs to the RBI, taking it away from the National Housing Bank (NHB) as a crisis involving non-banking finance companies started to grow. Even though housing finance companies (HFCs) are entities set up under a license by the NHB, they will now have to abide by the guidelines set by the banking regulator. Banks are already regulated by the RBI
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 repo rate-based lending rate for all loans after September 2019. On the other hand, loans by HFCs and NBFCs are linked to the prime lending rate (PLR),” explains Navin Chandani, chief business development officer, BankBazaar.com.
While banks cannot lend at rates below the RR, 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
According to Prashant Thakur, head – research, ANAROCK Property Consultants, the ongoing liquidity crisis in the NBFC industry, is the result of asset-liability mismatch (ALM).
“As 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,” Thakur explains.
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,” elaborates Amit Goenka, MD and CEO, Nisus Finance.
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?
Goenka maintains that 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.
Choosing between a bank and HFC: Points to consider
- Banks are swifter in transferring the RBI’s rate cut benefits. The same is not true of HFCs.
- The rate of interest will be invariably higher in case of HFCs.
- Unlike banks, HFCs are less strict with the documentation work. This means self-employed people will find it easier to secure a loan from HFCs.