In the current scenario, the category of Non-Banking Financial Companies (NBFCs) has registered good growth in the last few years. The credit goes to the various marketing tools being adopted by these companies, customer-oriented services, offering attractive offers and easy and transparent processes being followed by them for functioning.

These days, if you want to borrow money for a home but are having trouble getting a loan from a bank, you can turn to Non-Banking Finance Companies (NBFC).

                                                                                                                          Subas Tiwari  

What NBFCs offer?

In India, there are a large number of Non-Banking Finance Companies (registered under the Companies Act) which are engaged in offering credit to the public like that of banks. They also lend for availing Home Loans to eligible borrowers which are not always uniform.

If you feel that the local nationalized bank where your salary is being credited or your neighborhood bank is delaying their decision in sanctioning you a Home Loan (eligibility/ less amount of sanction issues) or rejecting your loan application for availing housing finance (your Credit Score is inadequate- 750 preferred), NBFCs are the next best option.

How do they do it quicker?

• They have less documentation
• They are aggressive in their approach
• Their loan process is quicker
• Their Credit Policy is flexible
• They sometimes provide doorstep services

Salient features of a NBFC Home Loan for individuals (salaried)

• Rate Of Interest is fixed based on Prime Lending Rate of the NBFC
• An inadequate Credit Score borrower would be sanctioned albeit with increased ROI
• Online loan application & process is available
• When they encash the advance cheque given for process fees, you know that your papers are in process

Are interest rates reasonable?

This is one area where the NBFCs are competitive, but this is also an area of concern for a consumer as his priority is to get the cheapest offer possible. Most of the NBFCs disclose their basic rate of lending, but also state applicability vaguely, maintaining that the rate of interest would depend upon individual requirements & consumer profile such as permanency in job, professional qualifications, etc. As & when interest rates change downwards, the NBFCs insist on payment of additional charges for each such interest downgrade/review. 

Interest Rate-How are they fixed by NBFCs?

• What is MCLR?

RBI governs the lending rates in India for financial transactions by financial institutions. Earlier, RBI used to follow a system known as BASE RATE in which RBI would decide the Base Rate & all FIs would follow that rate as the Minimum Lending Rate (MLR).

Since April 2016, RBI has changed the system to fix Base Rate to Marginal Cost (of funds based) Lending Rate (MCLR). There are set guidelines in RBI for revising this rate every month based on several factors including borrowing rates & the REPO rate.

• FLOATING RATE OF INTEREST

This is the lending rate charged to a loan borrower that is based on MCLR. Any change in MCLR will automatically affect the floating rate (increase or decrease). But the borrower enjoying a floating rate will not usually feel because when MCLR goes up, the tenure also goes up & vice versa. So when there is no change in the floating rate, the EMI stays fixed as it was though there would be a change in the floating rate which will affect/benefit the borrower in the rate of interest charged on his loan account.

In case the borrower wants the benefit of reduced EMI consequent to a reduction in the floating ROI, he needs to approach his NBFC to avail the benefit in which case the tenure of the loan (remaining period of loan) goes up accordingly.

• FIXED RATE

This is the lending rate which is charged to a borrower that stays fixed irrespective of change in MCLR. NBFCs do not usually encourage from Fixed Rate to Floating Rate but encourage vice versa.

• PRIME LENDING RATE

While it is mandatory to pass on the benefits under the MLR system (followed by banks), the same is not true under the Prime Lending Rate system followed by NBFCs. Under the PLR system, when RBI effects changes in MCLR, the PLR rate is kept unaffected as the NBFCs absorb the marginal increase. When MCLR is reduced, the PLR is kept intact & the benefit, if any, is passed on to the borrower on payment of additional Process fees after a written request is made for the same. This is true of each decrease in PLR. So NBFCs are free to set their PLR of their choice. 

It is left to the prospective borrower to negotiate the interest rate skillfully with the NBFC to obtain the best rate for himself.

Eligibility for a Home Loan

Eligibility for the home loan is based on the borrower’s profile such as

• Age
• Monthly income (Gross & Take Home)
• Spouse income
• Assets & Liabilities
• Stability of occupation
• No. of dependents
• Savings history
• Possibilities/opportunities for canvassing other institutional business income

What about Processing fees & Other Charges?

NBFCs ask for advance payment of Processing Charges while accepting loan proposal. The same is collected even when the loan process is incomplete.

Other Charges may include

• Charges for obtaining Statement of Account
• Document retrieval
• Addition/deletion of co-borrowers
• CERSAI (central Agency where documents are maintained) charges
• Database Admin fees
• External Legal opinion
• Fees for Valuation of property

Margin component (your financial contribution in the loan)

Most of the NBFCs charge upto 20% of the loan amount as borrower’s stake in the loan, though it is not uniform. NBFCs sometimes increase the margin component (so as to reduce their exposure on the loan amount) in case of certain inadequacies in the borrower’s profile such as inadequate credit score, job profile issues, etc. 

Insurance

To protect their risk on the loan in the event of unforeseen mishaps, almost all NBFCs want insurance coverage on the property mortgaged for a home loan against fire, earthquake, floods, etc.

It is also suggested that borrowers who avail a Home Loan against property mortgaged to NBFC, should also go in for life insurance (loan secured policy) on the borrower/co-borrowers, the Assured amount of which would be the outstanding in the loan account from time to time. This way, the huge loan burden would be met by the pre-maturity of the policy & spouse/legal heirs would be spared of the loan burden in case of the unfortunate death of the borrower. The premium on this policy can either be met directly by the borrower or request the NBFC to permit debiting of this premium amount to his loan account, if the NBFC so agrees.

Tax benefits

As per Income Tax Act, there are 2 sections under which exemptions can be claimed on NBFC-Home loan from your gross total income eligible to tax.

SECTION 80 C provides for income deduction on & upto Rs.1, 50,000 per assessment year for the principal amount of home loan repaid during the same assessment year.

SECTION 24(b) provides the applicable exemption from payment of tax on & upto Rs.2, 00,000 per assessment year on the interest component paid during the same year.

For ascertaining the interest component in the EMI (it includes interest & principal component) as well as the principal, you need to take Certificates from the NBFC every year for claiming the above exemptions (or ask for Amortization Schedule).

EXAMPLES OF HOME LOANS BY NBFCS  

Disadvantages of obtaining a Home Loan from NBFC

• NBFCs are fussy & secretive about internal loan process
• NBFCs sometimes force the borrower to buy other financial products
• In some NBFCs, process fees are at higher levels
• A few NBFCs insist on stiff conditions (such as providing collaterals) in their loan sanction
• Some NBFCs insist on higher margins (increase borrower stake)
• NBFCs do not normally disclose the reason for loan rejection (some of the reasons are too flimsy & not based on facts)

Grievance Redressal

Every NBFC is having an in-house Grievance Redressal Management system in place for aggrieved borrowers under the following tier system.

I Tier (Customer Service Department of the NBFC)

–Call Toll free Number

-Send SMS

-Send email

-Send letter (hard copy)

-Visit website & register your complaint/grievance online, you will get a customer service number

II Tier- (if no response is received within 6 weeks of your complaint or you are dissatisfied with the reply received)

–Email/write to the Grievance Redressal Officer (of the NBFC) with the copy of your grievance & the reply if any received at Tier-1

III tier- (if you are unhappy with the reply received from the GRO)

Approach the below on the prescribed format at- 

• Complaint Redressal Cell
• National Housing Bank

Online-https://grids.nhbonline.org.in/

By Post (offline mode)-write to

National Housing Bank

Department of Regulation & Supervision

(Complaint Redressal Cell)

4th Floor, Core-5A

India Habitat Centre

Lodhi Road, New Delhi-110003 

(National Housing Bank is the Regulator for NBFCs)

The important handles of this story

• Use your skills in getting a better rate of interest
• Pay Processing Fees only if your loan is processed to your satisfaction
• Insist on interest Rate Review as & when markets indicate rate reduction
• Take life insurance policy to cover the loan burden

The festival season is here! And to get into the festive mood, you will be wanting to do a lot of things. It’s possible that you require rapid cash without any difficulties or nonsense. Or perhaps you wish to take your family on a vacation during a festival like Deepavali or Dussehra. Perhaps you’re getting married and need money to plan your honeymoon? Or perhaps there will be a wedding in your family, necessitating financial support for the same? 

If you find yourself in any of these difficult predicaments and lack the necessary funds, getting a personal loan from a bank is your best option for covering these fixed expenses of a one-time nature.

                                                                                                                                 Subas Tiwari

What is a Personal Loan?

Personal loans are loans granted for a limited period with a fixed amount and charged interest which are both repayable in monthly instalments. They are called ‘clean’ or ‘unsecured’ loans, i.e., loans without obtaining any tangible security (property, deposits, bonds, etc.). Only the personal sureties are required to be furnished to confirm that you are a dependable person in the society & will not default repayment of the loan given. Personal loans are generally used to meet temporary cash requirements such as wedding, children’s education, home improvement/repairs, luxury holiday, buying a car or to buy an electronic appliance, etc.

There are several banks and financial institutions providing attractive deals on personal loan offers with lucrative interest rates. Each personal loan lending institution has different eligibility criteria, rate of interest, and repayment tenure, which should be reviewed and compared to make an informed and smart decision before applying. 

Eligibility for Personal Loan:

For Salaried Class

• Should have a running bank account where salary is being credited regularly. The bank account need not be with the bank where one is applying for a personal loan, but banks prefer to consider such loans to be given to their own clientele on priority.
• One should have a job of permanent nature. Banks would not give a loan to a person whose job is temporary. 
• The length of service or employment also plays a part in expediting the loan sanction.
• Place of residence should either be owned or rented with a lease agreement.
• Residence proof (voter ID card, Aadhaar Card, etc.) & identity proof (employment ID card, PAN card, etc.) copies should be produced duly self-attested along with bank application form along with 2 photographs.
• Though the reason/purpose of the personal loan is not mandatory, the bank would like you to state some reason (any one of the above or other purposes, which can be vague like-for meeting unplanned personal domestic expenses.)
• If you already enjoy any other loan like car loan or home loan, those deductions will also be taken into account to calculate total deductions out of the salary & arrive at an eligible loan amount.
• Your CIBIL score will also play a significant part in bank’s decision in granting a personal loan.
• There is no fixed criterion for arriving at an eligible loan amount, as individual banks have different methods of calculation but the generally accepted practice is to fix a ceiling of about 50% of deductions from the salary including the repayment of the loan to be granted. If you are within this ceiling, then the eligible amount could be about 10/12 times the gross monthly salary or 6 times the total taxable income as declared in Form 16 or the Income Tax Return. This can vary amongst nationalized banks & can be different among private banks (private banks commute on the take-home pay). 

For Self Employed

They are those who do either business or freelance assignments and some work from home too. They may do part-time or full-time assignments & so may be having more than one employer.

The following additional conditions may apply when they seek a personal loan from a bank.

• Since he does not get salary, the business income as reflected in the Income Tax Return would be the basis of ascertaining his total income.
• He may be required to submit details of his enterprise.
• The performance of the business can also be a factor to influence his loan sanction. In case of new enterprise, banks can insist on collateral securities like bank deposits, bonds, etc. in addition to providing one or more personal surety of adequate net worth.

For Professionals

They are those who either have their own business/service like doctor, lawyer, etc. or those who are technically qualified but are working in an organization.

The following could be additional conditions to be fulfilled.

• The attested copy of their qualification would be required to be submitted along with the application form.
• Since some of the banks have specialized personal loan scheme for such professionals offering lower rate of interest on such loan, the lending may ask some details of  the profession   as also copies of receipts/payments and/or income/expenditure account.

Advantages/ Benefits of a Personal Loan to a consumer-borrower

• The first & foremost benefit is the quickness with which the loan application is either sanctioned or disposed of (rejected). The icing on the cake is in the timing.
• Secondly, in most of the sanctioned personal loans, the banks do not insist on any collateral security or in some cases, even personal guarantee/surety. So it is advantageous for the loan-seeker, as he need not be under any obligation to his office colleague/friend into requesting for providing a personal surety.
• Most of the banks do not ask for margin component (borrower’s stake in the risk). Hence, there is absolutely no need for the consumer to run around to arrange to provide for depositing margin money.
• The purpose of the loan is immaterial in most cases. Hence, the consumer need not take pains to explain the genuineness of the purpose & submit proof for such purpose.
• Simple documentation is assured with no elaborate procedures.
• Making monthly repayments is now made consumer-friendly with banks agreeing to take post-dated cheques (PDCs) for the amount of each instalment and presenting the same on due dates of loan. The consumer need not visit the bank at all for such work. Where the loan instalment payable is to be taken out of the savings account of the customer, the banks obtain written instructions & act on them. 

Disadvantages/Limitations to the consumer-borrower

• The first & foremost is that the rate of interest is the highest for this type of loan. It’s a costly cost to the consumer, as this is an ‘unsecured’ loan. In comparison, secured loans are comparatively cheaper.
• Secondly, the period of the loan is normally limited to 60 months. Banks do not favour or take exposure for a longer tenure. This limits the consumers’ requirements, where, by getting a longer period of repayment, he could bring his work to completion. 
• According to bank sources, this type of loan is having higher risk and can end up as a Non-Performing Asset, if repayment stops midway either due to change of job/temporarily-unemployed status/death of the borrower/change of address without trace, etc. Hence, many banks do not consider giving a loan for non-customers, i.e., those who have no previous bank dealings with the lender. So, this severely restricts the options available to the consumer-borrower to seek a loan from any bank in the vicinity of his residence or place of work. 
• Most of the banks are not willing to grant personal loans of more than Rs.15.00 lacs even though their website/brochure talks of maximum amount being much more than what they say they will give. So, the consumer-borrower will not get the benefit of more loan even if he is otherwise eligible!
• Even though a couple of banks claim that they don’t need personal surety/guarantor for such loans, many of the banks insist on providing the same for the loan transaction to add trustworthiness to the loan contract.

So, what are you waiting for? Just read this article carefully; fully understand the pros & cons of personal loan & head on to the nearest bank to apply for a Personal Loan!

Banks Personal Loan Interest Rates