Videsh Adani wanted a home loan urgently to establish his SOHO (Small office Home office). He intended to ship custom made toys for children based on online requests from parents on his website. The idea was good but it would take some time to become profitable.

Considering he had made a significant investment in his start up model, he has very little security to offer. He had considerable savings and an old farm house surrounded by some land in a remote rural location. The banks that he approached were not interested in investing in this remote property and offering him the loan amount he wanted as there was very little scope for development in these areas and the estimated land value did not meet their expectations. He did not want to sell this property as he was sentimentally attached to it.

He knew Non-Banking Finance Companies NBFCs were an option but was worried about the interest rates until he saw an ad campaign, which surprisingly seemed to have lower interest rates! He was thrilled and decided to apply to them immediately!

How was it was possible for NBFCs charging double digit interest rates in the range of 18%-20% to offer competitive interest rates in the range of 9.5-13.5%? What are the cautions points that one needs to keep in mind if he opts for a loan from an NBFC?

By lowering interest rates NBFCs are slowly positioning themselves to become viable alternatives to traditional banks for procuring loans.  The fact that the RBI has put forth discussion papers on issuing banking licenses to new entrants and NBFCs could have also prompted this move.

How have NBFCs been able to offer loans at competitive rates?

The most important factor is availability of funds at a cheaper rate. Banks have been able to provide loans at relatively cheaper rates than NBFCs as they can get low cost deposits from masses.

While the source of funding remains a concern for NBFCs, they have devised various ways to fund their business.  For instance, debt markets have come handy for NBFCs to raise cheaper funds. This has also enabled NBFCs lower their interest rate.

NBFCs might offer competitive rates on home loans but their other charges are high. The prepayment charges, default charges, check bounce charges are higher compared to traditional banks. Their fee based income is also high.

Essentially, their focus on high yield areas and niche segments, efficient loan recovery, individual focus, and simple processes have helped them keep the cost low and reduce the interest rate on home loans, passing it on to its borrowers.

What should you keep in mind if he gets a home loan offer from an NBFC?

You should be wary of the very high fee charged by NBFCs. The charge on a default is usually much higher than that of a traditional bank.

You need to tailor the loan structure to suit his needs and adjust it according to the projection of profits from his business.

You would have the advantage of faster loan processing as NBFCs need less documentation.

However, you must ensure that all dealings with the NBFC should be documented and duly signed by officers of NBFC. Since NBFCs do not have to follow many guidelines of RBI, the borrower has to take extra steps to ensure everything is documented and there are no surprises in future.

Unless you are in a difficult situation, it is better to approach a bank for your home loan needs if you know for a fact that you have all the documents required for applying for a loan and meet the eligibility criteria.

Offers from different NBFCs   

Let’s take a look at the home loan interest rates offered by different NBFCs:

 

NBFC	Home loan interest rate	Description
India Bulls	9.5%	Up to 20 years,
Tata Capital	9.5%	Rs. 2 L to 3 Cr., up to 20 years tenure
Muthoot Housing Finance Limited	14-15%	Provides loans in the range of Rs.3-10 L
Edelweiss Capital	9.5%	Up to 25 years,  Part prepayment allowed without any charges
Dewan Housing Finance Ltd	Depends on individual cases. However their retail benchmark rate is 17%	Loan up to 5 Cr. or 85% of the value whichever is lower, tenure is up to 20 years.
M&M Financial services Limited	depends on individual cases	Providing loans for home construction, purchase, extension and improvement,

                      

Content partner:

BankBazaar.com is an online marketplace where you can instantly get the lowest loan rates, compare
and apply online for your personal loan, home loan, car loan and credit card from India's leading banks and NBFCs

Disclaimer: While we have made efforts to ensure the accuracy of our content (consisting of articles and information), neither this website nor the author shall be held responsible for any losses/ incidents suffered by people accessing, using or is supplied with the content.