Banks and NBFCs follow different guidelines when it comes to lending and, thus, home loans disbursed by them are also done on certain different parameters. Here’s all you need to know.
By: Adhil Shetty | Published: May 3, 2018 1:03 PM | Financial Express
When buying a house, we all want to get the best deal on the home loan we avail as it is probably the longest financial commitment we will make impacting our overall portfolio and expenses. However, deciding on the right financial institution to avail the loan from is a rather tricky task, given the market is competitive.
With the rise of non-banking financial corporations (NBFCs) in India, the choice has only gotten wider as customers can now choose not only among banks, but also NBFCs. But did you know that availing a home loan from a bank and an NBFC may seem similar, but work in very different ways?
Banks and NBFCs follow different guidelines when it comes to lending and, thus, home loans disbursed by them are also done on certain different parameters. Find out how these two differ when it comes to assessing an individual for a home loan and which one can you resort to for your home loan.
1. Interest Rates: MCLR vs PLR
Banks operate their housing loan interest rates based on Marginal Cost of Lending Rate (MCLR), which serves as their lending benchmark and is closely monitored by the RBI. On the other hand, loans by Housing Finance Companies (HFCs) and NBFCs are not linked to the MCLR. They are linked to the Prime Lending Rate (PLR), which is outside the ambit of the RBI. So while banks can’t lend at rates below the MCLR, PLR-linked loans do not have such restrictions.
Banks have both floating and fixed rates, of which before only floating rates felt the occasional impact of MCLR. But in February this year it was announced by the RBI that all new loans whether with floating interest rates or base rates will be linked to the MCLR.
An MCLR-linked loan clearly mentions the intervals at which its interest rate will automatically change. In a falling interest rate scenario, this allows customers to receive RBI-mandated rate cuts in a transparent, time-bound manner.
As NBFCs and HFCs are free to set their PLR, it gives them greater freedom to increase or decrease their loan rates as per their selling requirements. This sometimes suits customers and provides them more options, especially when they fail to meet the loan eligibility criteria of banks. But in many cases, for those who easily meet the criteria this may also result in inflated interest rates compared to banks.
2. Loan Eligibility via Credit Score
As paperless financial technology takes prominence, more and more lenders are depending on credit scores to determine loan eligibility. While there are upper caps set on interest rates through MCLR and PLR, the actual interest rate you pay on your loan is linked to your credit score. Leading lenders are known to offer their best rates to customers with a CIBIL score of 750 or more.
While both banks and NBFCs consider credit scores carefully, NBFCs tend to have more relaxed policies towards customers with low credit scores. However, with a very low score, both banks and NBFCs will likely charge you a higher interest rate. In some cases, banks may ask to convert the home loan into a secured loan by mortgaging some asset if the credit criteria is not met, but you still need the loan.
A customer with a low score can in fact start with a loan from an NBFC. Through timely repayment, s/he can improve his credit score. After this, once the bank’s eligibility criteria is met, the loan balance can be transferred to a bank.
To keep yourself ready, make sure to access credit reports by CIBIL or Experian. This will allow you to be ready even before you approach a lender. Since credit scores change every quarter, you can take your time to improve it before you decide to avail the loan in order to get a better rate of interest and disbursal amount.
3. Loan Amount
The actual cost of property is never just the selling price promoted by developers and builders. During acquisition it typically goes up as other costs like stamp duty, registration, an assortment of payments towards brokerage, furnishing, repairs and more always add up. Based on where you are in India, you may have to pay between 3 and 11 per cent of the property value as registration cost alone.
Banks are allowed to fund up to 80% of a property’s value. For example, if you are buying a property worth Rs 50 lakh, you may receive a loan of Rs 40 lakh from banks excluding the registration cost and associated charges of course. The rest of the fund requirements would have to be met by you and often these last mile costs weigh heavily on the final decision to buy a property.
Although both NBFCs and banks are not allowed to fund stamp duty and registration costs, NBFCs can include these costs as part of a property’s market valuation. This allows the customer to borrow a larger amount as per his eligibility.
4. Pre-Payment, Foreclosure and Late Payment Charges
Just like other loans, home loans also have associated charges attached. Both banks and NBFCs will have charges for pre-payment and foreclosure but NBFCs tend to charge much higher. In addition, late payment charges by NBFCs may sometimes be close to 10 or 20% of your monthly EMI, giving you no respite in case you default on any payment. NBFCs also tend to have higher processing fees, although some banks may charge similar amounts.
Whoever the lender may be, make sure to calculate you future interests and factor in additional costs associated with your repayment as home loans range between 10 and 30 years and you may have to bear such high charges in future.
(The writer is CEO at Bankbazaar.com)
G BALACHANDAR | Published on April 04, 2018 | The Hindu Business Line
But delinquencies are also on the rise
CHENNAI: The share of home loans to THE self-employed has increased to a little less than a third of the overall housing loan portfolio of housing finance companies (HFCs) from one-fourth of the portfolio four years ago, points out a report of rating agency Crisil.
Primarily driven by the government impetus to affordable housing, there has been a big surge in the self-employed taking home loans. In the overall home loan portfolio of HFCs, the share of self-employed borrowers is about 30 per cent now when compared with about 20 per cent four years ago.
“Several initiatives of both the government and the regulator in the recent past have led to fast growth in home loans taken by the self-employed. We expect such mortgages to continue showing good growth because of the sharp focus of smaller HFCs and increasing interest of the larger ones,” said Krishnan Sitaraman, Senior Director, Crisil Ratings.
Loans to the self-employed segment have grown at a CAGR of about 33 per cent in the past four years, compared with 20 per cent for the overall home loan segment. Home loans outstanding in the self-employed segment are expected to have topped ₹2 lakh crore by the end of 2017-18. Though new, small and larger HFCs have been aggressively catering to the self-employed segment, banks are also strengthening their presence in the home loan segment due to subdued credit demand from corporates and asset quality pressures.
However, on the flipside, delinquencies are also rising in the self-employed segment. Gross non-performing assets (NPAs) in the segment are estimated to have inched up by 40 basis points to about 1.1 per cent by the end of 2017-18, compared with about 0.7 per cent a few years back. This trend, however, warrants caution because lending to the self-employed is largely based on assessed income. Additionally, a section of borrowers, who have a limited credit history or banking experience, are highly vulnerable to disruptions such as demonetisation, and see high volatility in cash flows in the event of exigency.
“The two-year lagged NPAs in the self-employed segment, at about 1.8 per cent, is much higher compared with about 0.6 per cent in the salaried segment, where the portfolio quality has remained largely stable over the years,” said Rama Patel, Director, Crisil Ratings.
Given that the self-employed segment is relatively riskier than the salaried segment, HFCs tend to demand higher yields to offset higher credit cost. Further, to surmount borrower data issues, HFCs are adopting practices such as offering lower loan-to-value ratio, higher in-house sourcing, and developing the expertise to assess un-documented income.
While financiers are adopting a risk-based pricing approach, long-term sustenance will depend on strong credit and underwriting practices, said the report.
ECONOMICTIMES.COM|Updated: Jul 19, 2017, 03.57 PM IST
The need to disclose one’s permanent account number (PAN) has become essential in almost all financial transactions. But, when it comes to quoting bank’s PAN to avail certain tax benefits on home loan, not many could be aware of the same. And, locating the correct PAN of the bank may not be an easy task as well. Here’s a list of all bank’s permanent account number (PAN).
As a salaried individual, if you have taken a home loan and looking to get the tax benefit on the principal repaid and the also on the interest paid, providing certain details about the home loan such as home loan lender’s name, date of loan disbursement etc, to your employer was a necessary requirement. In addition to such details, one has to furnish the PAN of the lender as well. Locating the lender’s PAN may not be an easy task for many. Here is a list of banks with their PAN to help you furnish complete details to your employer.
As per the Rule 26C of the Income Tax Act, it has become mandatory from 1st June 2016, for the employee to furnish certain details to the employer for claiming the tax benefits on salary income. For this, the employee needs to fill and submit Form 12BB to one’s employer to claim tax benefits or rebate on investments and expenses.
The Form 12BB is basically a statement of claims by an employee to claim tax deduction on leave travel allowance (LTA), house rent allowance (HRA), deductions under chapter VIA (Section 80C, 80D etc) and interest paid on home loans.
Among other things as mentioned above, in the Form 12BB, one has to furnish specific details about the home loan:
(i) Interest payable/paid to the lender (during the financial year)
(ii) Name of the lender
(iii) Address of the lender
(iv) Permanent Account Number (PAN) of the lender
Use the information on this page to locate the PAN of your banker.
In case you want to confirm it, you can click here to verify it from the government website.
By Kavya Balaji | July 18, 2017 | Bank Bazaar
You have chosen your dream home and the project is approved by both banks and Housing Finance Companies (HFC). You need a Home Loan. Which lender should you go for? Are HFCs genuine? Are HFCs well regulated? Do they have fair loan practices? Will they provide standard services? All these questions might be playing in your mind. Here, we try to answer some of those questions for you.
Who supervises HFCs?
Unlike popular perception, HFCs are not unregulated. They are regulated by the National Housing Bank (NHB). HFCs need to register with NHB and the latter regulates and supervises them. There have been talks about the Reserve Bank of India (RBI) taking over but nothing is on the ground till now. However, NHB has been quite proactive in ensuring that Home Loan borrowers rest easy. These include steps like abolishing prepayment charges for floating rate loans, putting a cap on Loan To Value (LTV) ratio and making sure that HFCs have done proper provisioning for their bad loans. So, it is not right to say that HFCs are unregulated and are free to fix their own interest rates. They are well regulated and have standard industry practices when it comes to services.
What about their interest rates?
HFCs follow what is known as ‘Benchmark Prime Lending Rate (BPLR)’ model. They will fix an interest rate based on their average cost of funds. The loan rate that is fixed by HFCs will be at a discount to the BPLR.
There are two issues here. The BPLR is based on past cost of funds/interest rates and is not forward looking. Therefore, HFCs might be slow in passing on interest rate cuts to customers. Another point is that some of the HFCs might not be transparent with their BPLR.
Now, do banks offer better interest rates than HFCs? Sometimes, they do. This is because banks follow the Marginal Cost of Lending Rate (MCLR). Here, RBI ensures that the interest rate cuts made by the central bank are passed on to bank customers through the bank’s MCLR as quickly as possible.
However, note that there are HFCs that are competitive and do offer interest rates comparable to banks. Consider this: HDFC limited, one of the most popular HFCs, offers Home Loans starting at 8.5% while State Bank of India, the most popular bank, provides Home Loans that start at 8.65% unless you’re a woman. For women, SBI offers loans at 8.5%. HDFC has a standard loan process and the interest rates are transparent too.
So, HFC or bank?
You might think that at the end of the day, what matters is how quickly the firm/bank is able to pass on interest rate cuts as we are now on a downward interest rate cycle. Dies that mean you should choose a bank? Wrong!
Understand Home Loan is a long tenure loan. Most Home Loans stretch beyond 10 years. Given this scenario, when interest rates start increasing some years down the line, both banks and HFCs will pass on interest rate hikes quickly. Also, you might have to pay a heavy conversion fee for getting the lower rates now. Some HFCs actually charge a lower conversion fee than a bank.
Another important point that you need to understand is that interest rate cuts are passed on more quickly to new borrowers rather than existing ones. In case there are interest rate hikes, these will be passed on quickly to both new as well as old borrowers. So, passing on interest rates won’t matter as much in the long run. Then?
How expensive is that loan?
It doesn’t matter whether you take a loan from a HFC or a bank as long as you get competitive interest rates and terms. What would matter are the processing fees, prepayment fees and the foreclosure fees.
Typically Home Loans are taken by people in their 30s and are closed within 10 to 12 years. There are hardly a handful of people who let their Home Loan run till 20 years. This is because as people grow in their career, their salaries go up over a period of time and the EMIs seem smaller. So, they would rather repay the loan quickly then have a higher outgo in the form of interest. That is precisely why you need to check the prepayment and foreclosure fee. Heavy prepayment fees will mean an expensive loan. Same goes for foreclosure. There are several HFCs and banks that don’t charge fees for prepayment or foreclosure, even for a fixed rate loan. Consider this factor before zeroing in on a Home Loan provider. Some lenders have a waiting period before which you cannot prepay. Check this too, in case you want to use your yearly bonuses to prepay your Home Loan.
Most of the times, fixed rate loans become floating rate loans after a period of time. You have to go through the terms and conditions of the loan to see how interest rates might change. Another important point to note is whether a top up loan facility is available. Since a Home Loan is with collateral and the value of your home tends to go up over time, it is easy to get a top up loan on your Home Loan. They work out cheaper than Personal Loans. If your Home Loan provider is able to give you a top up loan on your Home Loan, it will be very useful if you need funds many years down the line.
So, there are multiple factors that you need to consider before choosing a Home Loan provider. Here’s a list:
- Interest rate offered
- Fixed or floating
- Processing fee
- Part-payment charges
- Foreclosure fee
- Conversion fee
- Top-up loan facility
- Service standards
Source : https://goo.gl/qf6Ypo
Banks have aggressively cut their home loan rates and once they begin fixing their bad loans, rates will drop further. Incremental business growth too could get slower as banks garner market share
Aparna Iyer | Last Modified: Wed, Mar 22 2017. 08 28 AM IST | LiveMint.com
Housing finance companies (HFCs) have had the best run over the last one year with their valuations soaring, especially after the government’s demonetisation exercise. The fact that in the wake of falling corporate loans, retail-focused lenders and HFCs in particular have the healthiest businesses has contributed a lot to these valuation increases.
Default rates in home loans are much lower than in corporate loans and the lowest among various retail loan segments. Notwithstanding the impact of the currency withdrawal on the real estate sector, home loan repayments haven’t been derailed while all other loans have succumbed to rising defaults. For instance, Housing Development Finance Corp. Ltd’s (HDFC’s) bad loan ratio was 0.81% as of December while that of Dewan Housing Finance Corp. Ltd (DHFL) was 0.95%. Bad loan ratios of banks are massive compared to these, courtesy their corporate loan book.
But the valuation of a business has a lot to do with future earnings and this is where the going will get tougher for HFCs.
Here is a line of caution that investors should focus on. The home loan market is getting extremely crowded, with most banks aggressively expanding their portfolio. The largest home loan lender is still a bank, State Bank of India (SBI), and it has been aggressive in the market for the past five years. SBI’s home loan book has grown at a 16% capital adjusted growth rate during the said period despite the large size, while its market share has remained at 15%.
But SBI is an old player and the new lenders who had jumped on the home loan bandwagon are all banks that were struck by rising corporate bad loans and shrinking credit growth. Bank of India, Bank of Baroda, Axis Bank Ltd, Kotak Mahindra Bank Ltd and others have laid out plans to expand mortgage loans. Further, predominantly corporate lenders, who had reduced their exposure to the home loan market, are now making a second entry.
The ensuing competition will begin to squeeze margins and this has already begun. Banks have aggressively cut their lending rates and once they begin fixing their bad loans, rates will drop further. SBI’s home loan rate has dropped 100 basis points (A basis point is one-hundredth of a percentage point) in the last one year and both SBI and HDFC currently give home loans at 8.5%. HFCs such as DHFL, CanFin Homes Ltd and Repco Home Finance Ltd lend at slightly higher interest rates.
Analysts at Kotak Securities Ltd note that spreads and margins for HFCs will narrow as the decline in their cost of funds too will be limited.
Incremental business growth too could get slower as banks garner market share. Axis Bank’s market share has risen by 60 basis points in the past two years while that of Kotak Mahindra Bank has grown by 50 basis points.
HFCs’ rich valuations are sure worth a second look.
MANJU AB | Fri, 13 Jan 2017-07:05am | Mumbai | DNA
With property valuation coming off, the attraction to shift to NBFCs for higher loan amount is also waning
Aggressive pricing of home loans by banks and higher income disclosures by customers after demonetization may see a shift of home loans from home finance companies (HFCs) to banks. With property valuation coming off, the attraction to shift to NBFCs for higher loan amount is also waning.
However, the HFCs say the market will expand as the income disclosures will go up and the secondary market, which was predominantly cash, will now go through the white economy, enabling banks and bigger HFCs to capture the market.
Keki Mistry, vice-chairman and chief executive officer, HDFC, told DNA Money, “The market size for home loans will expand as income disclosures will be higher and more customers will get bankable. The cost of funding for banks have certainly come down but no one is going to price a home loan based on temporary deposits like the savings deposits, as these savings deposits are now flowing into mutual funds, insurance and other higher yielding investments.”
Religare Securities said in a report that the ability to assess cash income and a high-risk appetite are key growth factors for NBFCs, “Now, some categories of borrowers whose disclosed income has risen after the note ban may become eligible for bank loans.”
Nearly 80% of the people buy homes directly from the primary market that is builders and most of them pay by cheque. The remaining 20% is the secondary market where cash is a predominant mode of payment.
“Now we can have access to that market as well as cash component is likely to be negligible, and hence the average loan size will go up if the entire value of the property is paid in cheque. Besides banks have CRR, SLR and priority sector that add to their cost. But certainly the silver lining is that due higher income disclosures and the so-called unproductive money moving into the white economy will improve prospects both for the primary and secondary markets,” Mistry said.
Analysts say that even HFCs, especially the larger ones, have seen a drop in their funding cost to the extent of 1% over the last six months.
Religare report said, “Direct selling agents have stated that valuers have reduced loan-to-value (LTV) ratios and raised the haircut assumptions on property value. Pre-demonetization, most balance transfers would take place between NBFCs and also from banks to NBFCs, in order to increase the loan amount or provide flexibility in loan repayment. This has come to a grinding halt as property valuations have come off. ”
Gagan Banga, vice chairman & managing director, Indiabulls Housing Finance, told DNA Money, “We deal with fully banked customers based on disclosed and reported income. Being AAA-rated allows us to borrow from the bond markets at very fine rates and that combined with our significantly lower cost income ratio letting us price loans across products including home loans and loan against property (LAP) on par with banks.”
In anticipation of the property prices correction, customers are going to keep away from purchases or take loans against property. The demand for home loans and also LAP is already slowing down. “The margin expansion story enjoyed by HFCs from lower borrowing costs and a richer loan mix is unlikely to be sustained,” the Religare report said.
Rating agency Icra said in a separate report, “Given that around 60% of the borrowings for HFCs are at fixed rates of interest, and the assets are largely on floating rate, it is likely to get impacted more on account of their relatively higher operating cost ratios.”
State Bank of India (SBI) chairman Arundhati Bhattacharya has said that there should be a level-playing field between banks and housing finance companies (HFCs) over pegging interest rates below benchmark rates.
Mayur Shetty | TNN | 02 November 2015, 8:07 AM IST | ET Realty
MUMBAI: State Bank of India (SBI) chairman Arundhati Bhattacharya has said that there should be a level-playing field between banks and housing finance companies (HFCs) over pegging interest rates below benchmark rates.
According to RBI guidelines, bank loans are priced above the benchmark rate, which is the ‘base rate’. In the case of HFCs, the benchmark is their prime lending rate. However, HFCs face no restrictions on lending below their prime lending rates. As a result when rates change, banks have less freedom to re-price loans selectively compared to HFCs, which can vary the spreads over or below the benchmark to any extent.
“I don’t think there should be any regulatory arbitrage (between banks and HFCs). Regulatory arbitrage always makes for an uneven-playing field, and in any area that you are operating it is important to have a level-playing field so that the most efficient of them do the best job,” said Bhattacharya.
According to her, the regulator had spoken of the difference between cost of funds for banks and HFCs as the reason for the discrepancy. “The regulator says that they also have to get their resources at higher cost compared to what the banks pay. So there are pros and cons for everyone and, therefore, how do you create equity so that everyone has a level-playing field? It is difficult to opine on this,” she said.
Explaining her earlier demand for more flexibility in home loans, Bhattacharya said that the bank was not seeking introduction of teaser loans. Rather, it was keen on introducing step-up loans where EMIs rise after initial years. “I believe that there is a place for this. When people take a loan, they go right up to the top. But over time, repayment becomes easier as salaries go up and lifestyle changes to adjust to the instalments, and within two or three years the EMI does not hurt as much as it did in the initial years. Therefore, a variable EMI is something that makes repayment easier,” she said.
She added that there are also some borrowers who do not immediately shift into the house and have an additional burden of rental in the initial two-three years. “There are difficulties in the first two-three years, which we feel if there is a step-up EMI, then that definitely addresses stretched budgeting for first-time home loan borrowers,” she said. On a proposal by the National Housing Bank to reintroduce prepayment charges on floating rate loans if loans are prepaid in the first two years, Bhattacharya said, “In case of floating rate loans, The loans are anyway floating downwards. In that case, is there any case for a prepayment penalty? We have not put our mind to it.”
Source : http://goo.gl/AIQdzr
By: Surabhi | New Delhi | December 9, 2014 8:01 am | Financial Express
Prime Minister’s Office has worked out a plan to ensure credit flow of Rs 2.3 lakh crore to home loans that would help build 11.5 lakh such homes.
In a boost to low-cost housing, the Prime Minister’s Office has worked out a plan to ensure credit flow of Rs 2.3 lakh crore to home loans that would help build 11.5 lakh such homes.
According to the proposal worked out by the PMO, the Employees’ Provident Fund Organisation (EPFO) and insurance firms will deploy 15 per cent of their corpus towards home loans of up to Rs 25 lakh for low-cost housing.
Accordingly, the Central Board of Trustees of the EPFO is set to consider a proposal to deploy 15 per cent of its Rs 6.5 lakh crore kitty in the bonds of housing finance companies engaged in low-cost housing as well as amend the scheme to allow premature withdrawals by subscribers before the minimum service period of five years for servicing home loans.
“The proposal from the PMO has worked out that this decision shall generate a credit flow of Rs 70,000 crore towards home loan for low-cost housing, which in turn will create Rs 3.5 lakh additional low- cost homes,” said the agenda for the CBT meeting on December 19. The PMO has further said that insurance companies and the EPFO should be directed to invest any shortfall in investments into the Rural Infrastructure Development Fund (RIDF) NABARD bonds in line with the priority sector limit shortfall guidelines for banks.
The move comes at a time when the Centre is working to promote affordable housing as well as develop 100 smart cities. Contending that housing loans given by housing finance companies are relatively low risk credits, the EPFO has accordingly suggested that its investment norms should be relaxed to allow more HFCs to become eligible.
Current investment norms allow the EPFO to invest in dual AAA rated bonds of companies making only seven HFCs eligible. These include HUDCO, HDFC, LIC Housing Finance, National Housing Bank, PNB Housing Finance, Dewan, Housing Finance Ltd and IndiaBulls Housing to which the EPFO has invested Rs 8,067.25 crore.
The EPFO has suggested that in order to invest the balance of Rs 55,618 crore in such companies, it should also invest in AA rated+ bonds of HFCs in which the government or any PSU or dual AAA rated private company has more than 25 per cent stake. Further, the current limit under which it can invest up to 40 per cent of the company’s networth should be increased to up to 60 per cent.
These relaxations will make more companies eligible including GIC Housing, Canara Home Finance, ICICI Home Finance, Gruh Finance and Sundram Paribas allowing additional investments of Rs 1,044 crore by the EPFO.
However, experts warn that home loans are not a low risk proposition and such decisions must be based on risk and returns. “The larger stakeholder should be involved. Investment decisions must be restricted to investment needs and not for imperatives for larger society,” said Amit Gopal, senior vice-president, India Life Capital Pvt. Ltd, an investment and legal consulting firm in retirement benefits.
Official data reveals that non-performing assets in the housing loan segment of public sector banks have shot up by over Rs 1,000 crore to around Rs 6,200 crore during the first six months of calendar 2014.
Source : http://goo.gl/dRw8yc