Should you take a home loan from a bank or an NBFC?You would find NBFCs more willing to lend even if you have a poor credit score
Adhil Shetty | June 10, 2017 Last Updated at 22:13 IST | Business Standard
Lending rates have trended downwards over the last two years. Currently, several lenders are offering home loans at an interest rate of 8.35 per cent, way lower than the 10-11 per cent rate that prevailed four years ago. For customers this translates into a lower Equated Monthly Installment (EMI) on an existing loan, or allows them to borrow more to finance a bigger home. As they begin the process of short listing a loan provider, customers may find themselves wondering whether they should borrow from a bank or an NBFC (non-banking financial company). Here’s a look at some of the key criteria that will help you make this decision.
MCLR vs PLR
All new loans with floating interest rates offered by banks are now linked to the Marginal Cost of Lending Rate (MCLR). This departure from the base rate regime began on April 1, 2016. The MCLR serves as a bank’s lending benchmark, upon which they charge an interest rate spread. For example, for home loans up to Rs 30 lakh, a leading bank has a spread of 35-40 basis points above its one-year MCLR of 8 per cent. 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. This wasn’t the case with the base rate-linked loans where transmission of rate cuts was weaker.
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. While banks can’t lend at rates below the MCLR, PLR-linked loans do not have such restrictions. NBFCs and HFCs are free to set their PLR. This allows NBFCs greater freedom to increase or decrease their loan rates as per their selling requirements. This suits customers and provides them more options, especially when they fail to meet the loan eligibility criteria of banks. This also needs to be understood in context of a customer’s credit score, explained below.
Loan to value ratio
The actual cost of property acquisition typically goes up to 105-110 per cent of the property value, including cost of stamp duty, registration, and an assortment of payments towards brokerage, furnishing, repairs, etc. Based on where you are in India, you may pay between 3 and 11 per cent of the property value as registration cost. Banks are allowed to fund up to 80 per cent 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. The other 25-30 per cent of your fund requirements would have to be met by you. Often, these last mile costs weigh heavily on the final decision to buy a property. Both NBFCs and banks are not allowed to fund stamp duty and registration costs. However, 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, thus giving the NBFC an edge over competition.
Both banks and NBFCs may bundle products. For example, it’s not unusual for lenders to sell a loan protection insurance plan along with a home loan. The insurance plan helps settle the loan in case the borrower were to pass away during the tenure. Both banks and NBFCs have cross-selling targets. While banks have a much larger range of products to sell, NBFCs push more aggressively to sell third-party products like insurance to bring in more profitability per customer. Compared to banks, NBFCs have a smaller customer base. They have fewer branches and operate in fewer locations. As a result, there is an increased focus on profitability per customer. Customers need to evaluate whether the bundled products are useful to them. If not, they can refuse them and save costs.
Today, there is heightened focus on customers’ credit scores. Increasingly, the interest rate you pay on your loan is linked to your credit score. For example, a leading bank had recently offered its best rates to customers with a CIBIL score of 750 or more. You needn’t wait to apply for a loan to find out your score. You can access one free report a year by visiting the websites of credit rating agencies such as CIBIL or through third-party credit report generators.
If you scan the loan market, you will see that NBFCs have more relaxed policies towards customers with low credit scores. However, with a low score, both banks and NBFCs will likely charge you a higher interest rate. Loan seekers can make the best of both these options. A customer with a low score may start with a loan from an NBFC. Through timely repayment, he can improve his credit score. After this, he may meet a bank’s eligibility criteria and may transfer the loan balance to the bank. If the outstanding loan amount at this point is small, it’s better to continue with the NBFC.
A home loan is typically a long-term commitment with significant interest costs. If you borrowed Rs 50 lakh at 8.6 per cent for 20 years, your total interest paid over the loan tenure will be Rs 54.89 lakh, which is more than the principal borrowed. Therefore, loan holders look to reduce their interest outgo through timely pre-payments. An overdraft (OD) loan facility helps in this regard. An OD loan is linked to the customer’s bank account in which he can park surplus funds. The surplus over the EMI amount is treated as pre-payment towards the home loan, thus bringing down the overall loan liability and interest charged on the balance. Moreover, the customer can still withdraw the surplus as and when he requires it. At present, only banks provide the OD loan facility and NBFCs don’t. This facility is useful to families with the ability to generate regular surplus income, such as a working couple. It is also useful for someone who may be in frequent need of short-term funds, such as a businessman who can withdraw this surplus based on his needs.
Paperwork and processing
Banks have more stringent paperwork requirements for home loans. This is not necessarily a bad thing for the loan seeker. In lieu of the greater scrutiny, he stands to receive an attractive interest rate. NBFCs are known for relaxed paperwork policies and faster processing. For example, in Bengaluru banks will not finance properties that do not have a ‘B’ Khata, but NBFCs will.
The writer is CEO, BankBazaar.com
Neha Dasgupta, Suvashree Choudhury, Savio Shetty | Sat, Nov 26 2016. 05 37 PM IST | Live Mint
RBI says banks will need to transfer 100% of their cash under the central bank’s cash reserve ratio from deposits generated between 16 September and 11 November
New Delhi/Mumbai: The Reserve Bank of India (RBI) on Saturday unexpectedly ordered banks to deposit their extra cash with it, in a bid to absorb excess liquidity generated by a government ban on larger banknotes.
Many Indians deposited their old notes with their banks after the ban on Rs500 and Rs1,000 notes on 8 November, which is aimed at tax evaders and counterfeiting.
Banks had put some of this cash into government bonds, sparking a rally that saw the benchmark 10-year bond yield fall more than 50 basis points to its lowest in more than 7-1/2 years.
The central bank said banks would need to transfer 100% of their cash under the RBI’s cash reserve ratio from deposits generated between 16 September and 11 November, saying it was a temporary measure that would be reviewed on or before 9 December.
Traders called it a drastic move intended to dent the rally in bond markets, adding that the RBI could have opted for more modest measures such as sucking out some of the liquidity through sales of market stabilisation bonds or telling banks to park funds under reverse repos.
The action could also temper market expectations that the central bank would cut interest rates by 25 basis points at its next policy review scheduled for 7 December, after already easing them by the same amount at its last review in October.
“The move is more of a ham-handed one than the finesse expected from the RBI,” said Shaktie Shukla, founder of boutique investment advisory firm Kaithora Capital.
“The liquidity sweep will definitely halt the down move in (bond) yields,” he added. “It will also temper the euphoria pre- RBI policy.”
The move is likely to drain over Rs3.24 trillion from the banks, according to Reuters estimates.
Traders said bond market yields could rise 8-10 bps on Monday, given that the RBI move would deprive the key source of funding seen in the past two weeks, while banking shares would likely take a hit.
Bond investors had also bet India’s demonetisation action would dent economic growth as consumers held back on purchases, raising the prospect of a rate cut by the RBI.
At the same time the bond rally had increased hopes it would lower borrowing costs in the economy and allow banks to reduce some of their lending rates.
On Friday the central bank also relaxed its liquidity auction rules by expanding its basket of securities that it accepts as collateral. Reuters
The platform owners & investors hail the move as regulation gives RBI’s stamp of approval to a business that is completely banned in countries like Japan & Israel
Anup Roy & Abhijit Lele | Mumbai | April 29, 2016 Last Updated at 00:25 IST | Business Standard
The Reserve Bank of India (RBI) on Thursday came up with a discussion paper on peer-to-peer lending (P2P), seeking to regulate the fast emerging crowdfunding platforms as the new financing model has assumed importance too significant to be ignored.
Interestingly, the platform owners and investors welcomed the development as regulation gives RBI’s stamp of approval to a business that is completely banned in countries like Japan and Israel.
“Any space where money changes hand should be regulated. Regulation is good for the industry, but it should be light regulation” said Mohandas Pai, former board member of Infosys and investor in Faircent.com, a P2P lending platform. “Regulation will help us in our business and we can approach the court of law as legal entities for our needs and even for recovery,” said Bhavin Patel, co-founder of LenDen Club, a P2P platform.
In fact, RBI itself is aware of this and sounded a little hesitant in giving this recognition to the business model. But the central bank officials, including Governor Raghuram Rajan, have said the RBI cannot remain indifferent to new innovation in financing activities and growth in P2P sector. To allow regulation, RBI’s discussion paper said the platforms should adopt a company structure that can then be regulated by the central bank. Currently, the P2P platforms are run by individuals, proprietorship, partnership or limited liability partnerships — areas outside RBI’s jurisdiction. The P2P platforms are largely technology companies registered under the Companies Act and acting as an aggregator for lenders and borrowers thereby, helping create a match between them.
“Although nascent in India and not significant in value yet, the potential benefits P2P lending promises to various stakeholders (to the borrowers, lenders, agencies etc.) and its associated risks to the financial system are too important to be ignored,” RBI said.
Presently, there are around 30 start-up P2P lending companies in India, RBI said. Globally, the cumulative lending through P2P platforms at the end of fourth quarter of 2015 reached £4.4 billion, from just £2.2 million in 2012. While banned in some countries, in some other jurisdictions, the P2P platforms are either considered part of banking, or are intermediaries.
RBI’s own discussion paper favoured the platforms to act as intermediaries, to be registered as non-banking finance companies with a minimum capital of Rs 2 crore, so that promoters have “skin in the game”. The discussion paper also sought to curtail the freedom of these companies significantly and said funds raised through the platforms should go directly from the lenders’ bank account to the borrowers’.
P2P LENDING BUSINESS
- The business size globally is £4.4 billion but nascent in India
- Completely banned in Israel and Japan but allowed elsewhere
- RBI plans to treat it as intermediary NBFC
- Minimum capital requirement is Rs 2 crore
- Should not take deposits
- Cannot show lending and borrowing funds in its balance sheet
- Money should go directly from lender to borrower
- Can only take fees, provide creditworthiness info
- Should not provide cross-border transactions
- Management should be stationed in India
Source : http://goo.gl/HB0yhG
By Preeti Kulkarni & Pratik Bhakta | ET Bureau | 12 Apr, 2016, 10.24AM IST | Economic Times
Smartphones are not just useful for social media, videos and taking selfies. They will now become an important part of your daily life by doubling up as a portal for making payments, sending and receiving money etc.
Ten of the country’s biggest banks along with the Reserve Bank of India have just launched a Unified Payments Interface (UPI) — a mega app that will sit on your smart phone once you have downloaded it and dramatically reduce the cost and time taken for making simple payments. What’s more, you can use this app to pay for any transaction below Rs 1 lakh, even something as low as Rs 50.
The biggest impact of this app will be on third-party payments. Today, if you want to pay someone, you need to add him or her as a beneficiary. You need the IFSC code and bank account number and branch etc. The UPI app does away with all this. All you need is the receiver’s unique ID. Open the UPI app, select the amount to be paid, add the unique ID of the beneficiary and select ‘send’. The app will ask for a mobile pin to authenticate the payment after which it is done.
This can be useful not just in making regular payments but also in transactions between friends. You have just had a drink at the bar and want to share the bill. One person pays and the others just transfer the money to his account. No need to use cash, no need for the IFSC code and all that.
Remittances will also become easier and the same process applies here as well. Cash on delivery, the big driver behind the ecommerce boom, will probably die a natural death for people with smartphones. They can use the UPI app to pay after receiving the goods. All they need to know is the unique ID of the ecommerce firm. The buyer can also scan a QR code that the delivery boy carries through his UPI app or pay directly to the unique ID of the delivery boy.
How can a customer use UPI
1. He will need to have a bank account and a smart phone.
2. Download the UPI app of a bank from PlayStore
3. Connect the bank account
4. Create a Unique ID
5. Generate a mobile pin
6. Also link Aadhaar number
Only 10 banks are part of this now but others are expected to join. Another big feature of UPI is that you can use any bank’s systems to transfer money or make payments. You don’t need an account with that specific bank to be able to use its UPI app. All you need to do is to download that bank’s UPI app, register yourself and make the payment.
Source : http://goo.gl/oou2db
While PSU banks offer 4% interest on savings deposits, private players offer as much as 6%
Press Trust of India | Mumbai | March 16, 2016 Last Updated at 00:06 IST | Business Standard
The Reserve Bank of India (RBI) has asked banks to pay interest on savings bank accounts on a quarterly basis or shorter duration, a move which will benefit crores of savings account holders.
At present, the interest is credited in savings bank accounts on a half-yearly basis. The interest rate on a savings bank account is calculated on a daily basis since April 1, 2010.
“Interest on savings deposits shall be credited at quarterly or shorter intervals (on domestic savings deposits),” RBI said in a circular issued on March 3.
While public sector banks offer four per cent interest on savings deposits, private players offer as much as six per cent. In 2011, the central bank had decided to give freedom to commercial banks to fix savings bank deposit rates, the last bastion of the regulated interest-rate regime. While giving banks this freedom, RBI had said a uniform rate would have to be offered on deposits of up to Rs 1 lakh.
On higher amounts, banks are allowed to offer differential rates to depositors. According to analysts, the lower the periodicity, the higher will be the benefit to savers.
Banks will have to shell out more for customers. According to estimates, the lower periodicity of interest payments might put a burden of Rs 500 crore on banks.
Earlier, banks used to give interest of 3.5 per cent on savings accounts on the basis of the least amount deposited in an account between the 10th and the last day of each month.
-At present, interest is credited in savings a/c on a half-yearly basis
-While PSU banks offer 4% interest on savings deposits, private players offer as much as 6%
-In 2011, RBI bank had decided to give freedom to commercial banks to fix savings bank deposit rates
-Lower periodicity of interest payments might put a burden of Rs 500 crore on banks
Source : http://goo.gl/QthRXy
Aparna Iyer & Vishwanath Nair | Last Modified: Fri, Dec 18 2015. 12 35 AM IST | LiveMint.com
RBI aims to make rates responsive to policy changes; change may make loans cheaper for new borrowers
Mumbai: Indian banks will soon have to price their loans based on rules announced by the central bank on Thursday in a move that is aimed at making lending rates more responsive to policy rate changes.
Starting 1 April, lenders will calculate their lending rates based on the marginal cost of funds, or the rate offered on new deposits. The new rules will likely to make loans cheaper for new borrowers. For existing borrowers, it may take as much as a year for the benefits to be transmitted.
Banks currently set their lending rates based on the average cost of funds on deposits outstanding.
Reserve Bank of India (RBI) governor Raghuram Rajan has repeatedly emphasized the need for banks to pass on interest rate cuts, saying less than half had been passed on to consumers this year.
While RBI has cut its benchmark rate by 125 basis points in 2015, lending rates have come down only by 60 basis points, RBI said in its December monetary policy review. One basis point is one-hundredth of a percentage point.
“While these guidelines will benefit new customers, existing customers will also have an option to shift to the new regime with some conditions,” Arundhati Bhattacharya, chairman of the nation’s largest lender State Bank of India, said in an emailed statement. “Sufficient time has been given to banks to switch over to the new regime of marginal cost of funds-based lending rate.”
By allowing banks to move to the new system for fresh loans and giving them the option to stay with the base rate system for existing loans, lenders will be spared a one-time hit to profits, which some had feared.
The Indian banking sector has struggled through a number of rate-setting methods over the last few years and has moved from a benchmark prime lending rate (BPLR) system to a base rate (or minimum lending rate) system and now the marginal cost of funds-based lending rate (MCLR). This time around, the shift was once again driven by weak transmission of interest rate cuts.
According to the new rules, every bank will be required to calculate its marginal cost of funds across different tenors. To this, the banks will add other components including operating cost and a tenor premium. A tenor premium is the compensation for the risk associated with lending for a longer time.
Taking all these components into account, banks will then publish an MCLR for overnight loans, one-month, three-months, six-months and one-year loans. This MCLR will act as the minimum or base lending rate for that tenor of loans irrespective of the borrower.
The final lending rate will be MCLR plus the spread that banks will charge for individual categories of borrowers.
“Apart from helping improve the transmission of policy rates into the lending rates of banks, these measures are expected to improve transparency in the methodology followed by banks for determining interest rates on advances,” RBI said in a statement on Thursday.
“The guidelines are also expected to ensure availability of bank credit at interest rates which are fair to the borrowers as well as the banks,” it said.
Bankers said the new rules related to differentiation based on loan tenor will help them price their loans better.
“The differentiation based on tenor will be a big positive for banks as now we would be able to price our loans based on the deposits of the corresponding tenor, rather than the older practice of considering 3-6 month deposit rate for computing base rates for all loans,” said R.K. Bansal, executive director at state-owned IDBI Bank Ltd. “Now we would be able to avoid this mismatch.”
With the inclusion of shorter term MCLR rates, banks can compete with the commercial paper market as well, Bansal added.
The new rules will reduce the cost of borrowing for companies, according to a Canara Bank official, who declined to be named as he is not authorized to speak to reporters.
“This has made the lending rate framework more dynamic as different banks could have different MCLRs for different tenures,” the official of the state-run lender said
In its circular, RBI said banks should specify the dates on which interest rates would be reset for borrowers. This reset must have at least once a year but can happen more frequently as well.
“The MCLR prevailing on the day the loan is sanctioned will be applicable till the next reset date, irrespective of the changes in the benchmark during the interim period,” said RBI.
Banks, however, have been given the option to keep outstanding loans linked to the base rate system even though it said existing borrowers will also have the option to move to an MCLR linked loan “at mutually acceptable terms”.
Most banks are unlikely to offer this option easily, said a banker who declined to be identified, which means that any immediate hit to profitability may be avoided.
“We don’t expect much of an impact on margins since the existing loans have been left untouched,” said Bansal.
Certain loans such as those extended under government schemes or under restructuring package, advances to banks’ depositors against their own deposits, loans to banks’ own employees including retired employees and loans linked to a market-determined external benchmark will be exempt from the MCLR rule, RBI said.
Fixed-rate loans granted by banks will also be exempt from MCLR. However, in case of hybrid loans where the interest rates are partly fixed and partly floating, interest rate on the floating portion should adhere to the MCLR guidelines.
RBI had mooted adoption of marginal cost of funds for calculation of lending rates in its April policy citing lack of effective transmission of its rate cuts into bank base rates. Bankers cited the stickiness of deposit rates and lack of credit demand as reasons for the delay in passing on lower rates.
“There might be short-term problems when dealing with the new norms as banks might want to offer better spreads to their larger customers who can negotiate a better rate. However, once the system stabilizes, it will be more or less uniform across the board and borrowers will get rates which reflect the interest rates in the economy better,” said Vibha Batra, senior vice-president at rating company Icra Ltd.
Batra added that there could be some shuffling in the home loan segment since existing borrowers will also want to move to an MCLR-linked rate if they see that as being cheaper. Banks, however, may be reluctant to allow existing borrowers to move.
“Lenders will have to come up with better schemes to retain home-loan customers by allowing them to move to the MCLR regime,” said Batra.
Source : http://goo.gl/2RGbeJ
By Atmadip Ray, ET Bureau | 14 Dec, 2015, 09.12PM IST | Economic Times
KOLKATA: Reserve Bank of India on Monday refuted rumours which is making people believe that currency notes with scribbling on them would cease to be legal tenders from January.
Rumours are doing the rounds in the social media that banks would not accept currency notes with writing on them from next month.
The central bank has denied having issued any such communication.
It has reiterated that all currency notes issued by it are legal tender and banks and members can freely and without fear accept them in exchange for good and services.
Source : http://goo.gl/6ttmFc