NBFC or Bank: Which Is Better for a Home Loan?

With the growing number of banks and NBFCs, borrowers have numerous options for availing of mortgage loans like home loans and loans against property. If you are planning to take a home loan, a quick google search will take you to hundreds of websites of banks, NBFCs, and Housing Finance Companies (HFCs) with attractive loan offers. While both; banks and NBFCs, lend money and charge interest, they are significantly different from each other. As a potential borrower, it is crucial for you to understand the benefits and disadvantages of both so that you can decide whether you should choose a bank or NBFC for a home loan.

What is NBFC?

A Non-Banking Financial Company (NBFC) is a company registered under the Companies act of 1956 that carries out specific financial activities. These companies are regulated by the Reserve Bank of India (RBI). The NBFCs are engaged in the business of loans and advances, leasing, hire-purchase, insurance business, acquisition of shares, stocks, bonds, debentures, securities issued by the Government or local authority or other marketable securities. The RBI has provided guidelines regarding the activities in which the NBFCs can engage. These financial institutions have the principal business of receiving deposits under any scheme or arrangement in one lump sum or in instalments by way of contributions or in any other manner and providing loans and advances in return for the interest. The RBI has provided guidelines regarding the activities an NBFC can engage in.

What is the difference between a Bank and NBFC?

While NBFCs are involved in the same activity of lending and accepting deposits as banks, there are a few yet significant differences between banks and NBFCs:

1. Unlike banks, NBFCs cannot accept demand deposits.

2. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on themselves.

3. Deposit Insurance and Credit Guarantee Corporation (DICGC), a deposit insurance facility for bank deposits, are not available to the depositors of NBFCs.

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Differences between banks and NBFCs pertaining to Home Loans:

1. Interest Rates:

Currently, banks are offering home loans at around 7% interest rate. The banks offer home loans at a floating interest rate, which may change in future depending on market variations. However, the borrowers get to know about the change in interest rate well in advance so that they can plan their funds accordingly. The RBI mandates banks to link their floating interest rates to an external benchmark. On the other hand, NBFCs are linked to internal benchmarks called Prime Lending Rate (PLR). Hence, the interest rate varies for each borrower and depends upon his/her creditworthiness. As a result, the riskier your credit profile is, the higher your PLR will be.

2. Stamp Duty and Registration Costs:

When determining your loan amount, banks generally do not include charges like stamp duty and registration costs that are a part of the overall property valuation. These charges could be considerably high, and some individuals may not afford to pay them upfront. Most NBFCs include stamp duty and other registration costs in the loan amount. So, in case you are unable to pay these costs from your pockets, you can include them in your home loan amount.

3. Loan Approval and Sanctioning Process:

With the efficient use of technology, the loan approval and sanctioning process of NBFCs are quite faster than banks, especially public sector and cooperative banks. However, private-sector banks are equally quick in terms of loan approval and sanctioning processes. Due to the increased competition in the market, many public sector banks are changing their gears and offering faster loan approval processes. Nowadays, leading banks and NBFCs can sanction your home loan in as low as 72 hours.

4. Eligibility Criteria:

Banks have stringent home loan eligibility criteria compared to NBFCs. Credit score and credit history play a significant role in the assessment of your creditworthiness for bank loans. The higher the credit score and the stronger the credit history, the more your bank loan approval is likely. Banks avoid lending to individuals with low credit scores. Whereas, you can get a home loan from an NBFC even with a low credit score as, apart from the credit score and credit history, NBFCs have several other criteria to assess your creditworthiness. However, bear in mind that if your credit score is not good, the NBFCs can charge you a significantly high home loan interest rate.

5. Security:

Banks and NBFCs come under RBI regulations under the Reserve Bank of India Act. However, banks are directly governed by the RBI, and hence their processes and work are scrutinised as per the rules of the RBI. Bank deposits of up to Rs 5 lakhs are secured by the Deposit Insurance and Credit Guarantee Corporation (DICGC). However, this facility is not provided for deposits made in NBFCs. Besides, the NBFCs can change certain parameters, like interest rates, without any prior notice. Hence, borrowing and depositing in NBFCs is considered relatively riskier than that of banks.

Should you choose a bank or NBFC for a home loan?

Most potential home loan borrowers consider only interest rates as a deciding factor when choosing a home loan lender. However, it is necessary to understand that while banks might offer comparatively lower interest rates, home loan interest rates are floating and can be changed as per the market conditions. Since a home loan is a long-duration loan, which is typically taken for 20-30 years, apart from the interest rate, a potential borrower must consider other important factors, such as eligible loan amount, ease and speed of loan approval process, time taken to sanction the loan, convenience to apply and repay the loan, availability of customer support, quick and easy access to the loan account and other information such as interest certificate, etc.

If you are buying a standard property and are eligible for a bank home loan, it makes sense to opt for a home loan from a bank. A good credit score and strong credit history will give you an opportunity to negotiate on the interest rate and get the best deal. Since the home loan interest rates of banks are linked to the external benchmark and are governed by the RBI, you will pay less interest in the long term, even if your current interest rate seems high compared to the NBFCs. Besides, as a home loan is a big loan, even a small difference in the interest rate can substantially affect the overall interest outgo. However, if the interest rate is not your concern and you can manage to pay the high interest with your current income, NBFCs or HFCs can offer you several other benefits that you must consider. You do not have to compromise on your dream house if your credit score is low or do not have a budget to pay the down payment required by the bank because an NBFC can provide you with a large-amount home loan, including stamp duty and registration charges, even if you do not have a good credit score. Furthermore, if you are not eligible for the required amount of bank home loan, you can avail of it from an NBFC and, after getting a better deal from your preferred bank, opt for a home loan transfer.

Warm Regards,
Ketki Jadhav
Content Writer