Home Loan: Why NBFCs or Housing Finance Companies charge higher interest rates than Banks

Home Loan Interest Rates (Banks vs HFCs/NBFCs): Home loans are provided to customers by Banks and certain Non-Banking Finance Companies (NBFCs) registered as Housing Finance Companies (HFCs).

home loan banks vs hfc
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Home loans are provided to customers by nationalised Banks and certain Non-Banking Finance Companies (NBFCs) registered as Housing Finance Companies (HFCs). All of these institutions are regulated by the Reserve Bank of India (RBI). However, the interest rate on home loans charged by HFCs is higher than banks.

According to Finance Minister Nirmala Sitharaman, HFCs charge higher interest rates as they typically raise funds from the market or other lenders. In contrast, banks get funds at a lower cost as they have access to currency accounts and savings accounts deposits at nil or zero interest. The Finance Minister said this in a written reply to a query in the Rajya Sabha recently.

The question sought Government’s response on: “whether Government is aware of the fact that some Non-Banking Financial Companies (NBFCs) are charging approximately double rate of interest on Home loans as compared to nationalized banks from the people residing in tier 1,2 and 3 cities.”

Replying to the query, Sitharaman said, “As informed by National Housing Bank (NHB), the rate of interest charged by HFCs begins from 6.50 % p.a. As Reserve Bank of India (RBI) has deregulated interest rates, the rates are determined based on the Board approved policies of the HFCs. The rate of interest charged to an individual borrower depends on variety of factors such as cost of funds for HFC and other variables which, inter alia, include profile of the borrower, credit history/score, stability of income, quantum of loan, tenor of the loan etc.”

“NHB has informed that rate of interest charged by such HFCs is generally higher than that charged by Banks as banks have access to Current Accounts and Saving Accounts deposits at nil or low interest which results in lower cost of funds to them while HFCs typically raise funds from the market or other lenders,” she added.

The RBI’s guidelines, issued through a circular dated February 17, 2021, cover the regulation of excessive interest charged and fair practice code for HFCs.

“As per this circular, the Board of each HFCs shall adopt an interest rate model taking into account relevant factors such as cost of funds, margin and risk premium and determine the rate of interest to be charged for loans and advances. The rates of interest and the approach for gradation of risks, and penal interest has to be disclosed to the borrowers in the application form, and in the sanction letter besides making available on their website or published in the newspapers,” Sitharaman said.

“Further, HFCs have been advised to put in place an internal mechanism to monitor the process and the operations so as to ensure adequate transparency in communications with the borrowers,” she added.

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