Home Loan by NBFCs

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.

Interest Rates of Top Housing Finance Companies in India

Name of Lender

Up to Rs. 30 Lakh

Above Rs. 30 Lakh & Up to Rs. 75 Lakh

Above Rs. 75 Lakh

LIC Housing Finance

8.65% – 10.10%

8.65% – 10.30%

8.65% – 10.50%

HDFC Ltd.

8.45% – 10.35%

8.45% – 10.60%

8.45% – 10.70%

Tata Capital Housing Finance

8.95% onwards

8.95% onwards

8.95% onwards

Bajaj Housing Finance

8.75% onwards

8.75% onwards

8.70% onwards

PNB Housing Finance

8.50% – 14.50%

8.50% – 13.00%

8.50% – 10.85%

Repco Home Finance

9.25% onwards

9.25% onwards

9.25% onwards

GIC Housing Finance

8.45% onwards

8.45% onwards

8.45% onwards

Indiabulls Housing Finance

9.30% onwards

9.30% onwards

9.30% onwards

Aditya Birla Capital

8.75% – 14.50%

8.75% – 14.50%

8.75% – 14.50%

ICICI Home Finance

9.20% onwards

9.20% onwards

9.20% onwards

Godrej Housing Finance

8.64% onwards

8.64% onwards

8.64% onwards

L&T Housing Finance

8.65% – 8.75%

8.65% – 8.75%

8.65% – 8.75%

Interest rates sourced from- https://www.paisabazaar.com as of 8th February 2023

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  

Example 1 Example 2
(Salaried) (Salaried)
LOAN AMOUNT Rs.50, 00,000 LOAN AMOUNT ** Rs.42, 50,000
REPAYMENT PERIOD 30 YEARS REPAYMENT PERIOD 20 YEARS
(360 MONTHS) (240 MONTHS)
EMI Rs.38, 446.00 EMI Rs.40, 033.00
(Criteria-Stability in job, regular promotion,fixed income, etc.)
(Criteria-frequent job changes, transferability/job relocation, etc.)

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)

Keep these things in mind before obtaining a Home Loan from a NBFC

  • Home loans offered by NBFCs are usually linked under the prime lending rate system. But all banks are now mandated to have all loans linked to MCLR (Marginal Cost of funds Based Lending Rate). This is more beneficial to a customer and also provides all customers a similar rate of interest on home loans. However, a prime lending rate system may have higher interest rates and the rates may fluctuate throughout the term of the loan.
  • Banks are also mandated to pass on the benefits of the RBI to customers, whereas NBFCs are not required to do so. NBFCs are free to set their own rates of interest while banks have to reduce their rate of interest in case the RBI does so. On the flipside, banks are not allowed to lend below their MCLR values, but Non-Banking Financial Services are more than welcome to do so. In some cases customers may benefit from lower interest rates as well.
  • Banks have the option of providing an overdraft facility on a loan. The overdraft facility is linked to the borrower’s account and can be used if he/she wishes to avail a surplus amount. NBFCs do not have this option.
  • NBFCs are less stringent when it comes to paperwork and other regulations. However, it must be understood that this also means that there is no regulation on the interest rate that a NBFC can offer. They can offer you a rate of interest that is considerably higher than that of a bank. Another point to take note of is the fact that you may still obtain a loan from a NBFC even if you have a low credit score as they are less stringent in the approval process. While banks are comparatively stricter when it comes to approving a loan. Usually customers looking for a home loan with low credit scores get their application rejected by banks.
  • As NBFCs have a smaller customer base, it is more likely that you will get your home loan approved. Non-Banking financial companies will sell you housing loans and other financial products simply to boost their business. However, you must evaluate your repayment capacity before jumping into obtaining a home loan with a NBFC. If you are incapable of repaying, your financial health can decline for quite some time.

      Although obtaining a housing loan with a NBFC has its benefits, always do your research, evaluate you repayment capability, and understand the offer at hand before accepting the loan. It may be comparatively easier to attain a home loan from a NBFC, but can be a financial burden if the interest rates obstruct your repayment capacity.

    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
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