The growing number of banks and NBFCs offering home loans and loans against property has increased fourfold in recent years. Homebuyers planning to avail of home loans can either opt for one of the best banks for home loans or a Non-Banking Financial Company (NBFC) to fulfil this requirement. While banks and NBFCs offer home loans by charging specific interest rates, they differ considerably in many aspects.
As a potential borrower, knowing the difference between banks and NBFCs is essential to determine which one best suit your needs.
What is NBFC?
A Non-Banking Financial Company (NBFC) is registered under the Companies Act of 1956. As the name suggests, NBFCs offer various financial services but differ from banks. They typically engage in the business of loans and advances, micro-financing, insurance services, credit card services, investment and asset management services, leasing, hire-purchase, etc.
Bank vs NBFC
Below are a few fundamental differences between banks and NBFCs.
| Parameter | Banks | NBFCs |
|---|---|---|
| Act | They fall under The Banking Regulation Act, 1949 | They are incorporated under the Companies Act 1956. |
| Demand Deposits | Accept | Do not accept |
| Debit and Credit Card | Can issue debit and credit cards | Can only issue co-branded credit cards with the banks |
| Maintenance of Reserve Ratio | Mandatory | Not required |
Home Loan from Bank Vs Home Loan from NBFC: Which One Should You Choose?
Typically, home buyers have always opted for home loans from banks until recently. However, the landscape is changing, and NBFCs are now gaining popularity.
When a bank often fails to offer a home loan, rejects the application, or offers loans at higher interest rates, it is only then people turn towards NBFC as they have lenient rules compared to a bank. As a result, people no longer opt for home loans from NFBC’s as their second option.
It is crucial to understand the difference between banks and NBFCs, specifically for home loans
Interest rates
Both banks and NBFCs offer home loans with different interest rates. This is because banks are regulated by the Reserve Bank of India (RBI), and the interest rates are based on the Marginal Cost of Lending Rate (MCLR) or the Repo Rate. Hence, when RBI’s repo rate changes depending on various economic conditions, it forces the bank to change the home loans with floating interest rates. However, banks follow complete transparency in the entire process. On the contrary, home loan interest rates from NBFCs are based on Prime Lending Rate, which is not linked with the RBI. The lender fixes the prime lending rate, and the borrower can negotiate the rates and favourable terms and conditions based on the eligibility criteria and credit score.
Eligibility criteria
Compared to NBFCs, banks usually have strict home loan eligibility criteria. Therefore, the borrower’s creditworthiness is vital in offering home loans. Individuals with lower credit scores and poor credit history may face rejection from the bank. Individuals with lower credit scores can secure home loans from NBFC as they have various other criteria to assess the borrower’s creditworthiness. However, individuals with low credit scores may attract higher interest rates from NBFCs.
Flexibility of terms
NBFCs offer more flexibility in terms compared to a bank home loan. The paperwork and processes required while applying for a loan from NBFC are typically lesser. Since the rules are less rigid, the borrower can get a loan even if they have a low credit score and for a longer duration with NBFC.
Security measures
Both banks and NBFCs come under RBI regulations; however, since the RBI directly governs banks, they are under complete scrutiny. This is not the case with NBFCs. Bank deposits of up to ₹5 lakhs are secured by the Deposit Insurance and Credit Guarantee Corporation (DICGC), hence offering a certain level of security. This regulation does not apply to NBFC. Moreover, NBFCs can make changes in their interest rates without prior notice.
Conclusion
Many home loan borrowers consider only interest rates as a determining factor when choosing a home loan lender. Both banks and NBFCs have their advantages and disadvantages, but if one meets the eligibility criteria of banks with a good credit score, it is recommended to opt for a home loan from the bank. However, one should ensure selecting one of the best banks for home loans.
Before you avail of a home loan, take an online tour with Piramal Realty to experience contemporary luxury living and know what a dream home is made of.
Disclaimer- This article is based on the information publicly available for general use as well as reference links mentioned herein. We do not claim any responsibility regarding the genuineness of the same. The information provided herein does not, and is not intended to, constitute legal advice; instead, it is for general informational purposes only. We expressly disclaim /disown any liability, which may arise due to any decision taken by any person/s basis the article hereof. Readers should obtain separate advice with respect to any particular information provided herein.
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