What is better for a home loan or LAP – A bank or an HFC? All you need to know.
A bank, as per the Reserve Bank of India (RBI), is an all-in-one authorized financial institution accepting deposits, providing loans, and offering various financial services. Banks in India are regulated by the Banking Regulation Act, 1949. They are required to obtain a banking license from the RBI to operate.
In contrast, a Housing Finance Company (HFC) in India is regulated by the National Housing Bank (NHB), not directly by the RBI, under the NHB Act, 1987. The NHB sets guidelines and regulations related to capital adequacy, prudential norms, and other aspects to ensure the stability and soundness of HFCs.
When it comes to home loans or Loan Against Property (LAP), this guide breaks down the differences between banks and HFCs, helping you make an informed choice for your financial journey.
These definitions and distinctions evolve over time based on RBI guidelines.
| Large Banks in India | Large HFCs in India |
|---|---|
| State Bank of India (SBI) | HDFC Housing Finance (now with HDFC Bank) |
| HDFC Bank | LIC Housing Finance Limited |
| Punjab National Bank (PNB) | Indiabulls Housing Finance Limited |
| ICICI Bank | L&T Housing Finance Limited |
| Axis Bank | PNB Housing Finance Limited |
| Kotak Mahindra Bank | IIFL Housing Finance Limited |
| IndusInd Bank | Tata Capital Housing Finance Limited |
| Yes Bank |
Whether applying for a home loan or a loan against property (LAP) with a bank or a HFC, the process with each financial institution could vary significantly. In general, each financial institution has a set of criteria by which they ascertain “eligible borrowers”. Some of the criteria include strong credit history showing track record of repayment, appropriate disposal income if you are a salaried individual or appropriate earnings through your business. If you’re such an individual or an MSME who has a strong application and is likely to be eligible across multiple lenders, following are the considerations you can use to prioritize.
Choose a bank over a housing finance company for:
- Lower Interest Rates: Banks, especially public sector banks, often offer competitive interest rates on home loans. If a bank provides lower interest rates compared to NBFCs, it can result in reduced overall borrowing costs.
- Regulatory Oversight: Banks are subject to strict regulatory oversight by the Reserve Bank of India (RBI). This regulatory scrutiny can provide borrowers with a sense of security and transparency in dealings, ensuring adherence to regulatory guidelines.
- Better Accessibility: Banks generally have a more extensive branch network and ATMs, making it convenient for borrowers to access services, make payments, and seek assistance. This widespread accessibility can be an advantage for those who prefer physical interactions.
- Government Schemes and Subsidies: Banks often participate in government housing schemes and subsidy programs. If there are favorable government initiatives in place, obtaining a home loan from a bank may provide access to subsidies or benefits.
- Integrated Financial Services: Banks typically offer a comprehensive range of financial services, including savings accounts, fixed deposits, and investment products. If a borrower prefers to have multiple financial services under one umbrella, choosing a bank might be advantageous.
Choose a housing finance company over a bank for:
- Specialized & Innovative Products: HFCs often specialize in housing finance and may offer specialized home loan products tailored to the needs of homebuyers. If you are looking for specific features or benefits related to housing finance, an HFC might have more targeted offerings.
- Faster Processing: HFCs are known for streamlined and efficient processing of home loan applications. If you need quick approval and disbursement, an HFC may provide a faster turnaround time compared to some banks.
- Customer-Centric Approach: Some HFCs adopt a customer-centric approach, providing personalized services and assistance throughout the home loan process. If you value a more personalized experience, an HFC might be a suitable choice.
- Interest Rate Competitiveness: While interest rates vary, HFCs may sometimes offer competitive interest rates and promotional offers. It's essential to compare interest rates, fees, and other charges to determine the most cost-effective option for your specific situation.
- Focus on “micro markets”: HFCs focus exclusively on the housing finance sector, which means they may have a deeper understanding of the real estate market and each of its serving “micro markets”. This specialized knowledge can be advantageous when dealing with home loans.
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