What is the difference between Housing Finance Corporations (HFCs) and Banks?
Planning to buy a home, but don’t have enough funds? You can apply for a home loan.
Planning to buy a home, but don’t have enough funds? You can apply for a home loan. There are several housing finance companies (HFCs) and banks that offer home loans at lucrative deals and interest rates. But we often struggle while deciding between these two options. Before picking your choice, it is important that you first clearly understand the differences between the two.
We have listed a few differences between Housing Finance Companies and banks:
1. Types of loans provided:
Housing finance companies only provide housing-related loans like to Apply Home Loans, loan against property and construction loans. Banks, on the other hand, provide different types of loans like personal loans, car loans as well as home loans.
2. Where do they get their funds?
Both banks and HFCs need to generate funds before they start disbursing loans to the customers. The difference lies in the way these funds are generated. Banks lend loans by using the money deposited by customers in current and savings account.
HFCs do not have access to such funds and hence they generate funds in a different way. Reputed HFCs like HDFC and DHFL raise funds by borrowing from the banks as well as from the public. Smaller HFCs generate funds by borrowing from banks. As they use money from banks, the cost of generating funds is higher for HFCs than banks. This is why HFCs charge a higher rate of interest.
3. Which authority sets the rule?
While HFCs are governed by National Housing Bank (NHB), banks are ruled by Reserve Bank of India (RBI). NHB was established to regulate HFCs in 1988, although some aspects of HFCs are still regulated by the RBI.
4. What about their interest rates?
HFCs follow Benchmark Prime Lending Rate (BPLR) model. They fix interest rates based on their average cost of funds. The loan rate that is fixed by HFCs will be given at a discounted rate. Let’s say an HFC’s PLR is 16%. They will discount this rate by a certain amount, say 5%. This discount is decided by each individual HFC.
Interest Rate = PLR – Discount = 16-5 = 11%.
Banks calculate interest rate in a slightly different manner. They first calculate the marginal cost of funds based lending rate (MCLR) which is decided by the RBI. It is the minimum rate below which banks are not allowed to lend to its customers. The interest rate is generally higher than the MCLR. To calculate the interest rate, Spread is added by the banks. Let’s say the MCLR is 8%. If a particular Bank’s Spread is 0.25%, then it’s Interest Rate = MCLR + Spread= 8+0.25 = 8.25%.
Note: As per RBI regulations, once a customer has been given a loan, the bank cannot change that customer’s spread unless there is a change in his/her creditworthiness.
Benefits of HFCs over banks:
• Quicker loan disbursal
• Leniency in documentation, eligibility and credit score assessment
Benefits of banks over HFCs:
• Lower interest rate
• When RBI reduces MCLR, the benefit is promptly passed to the customer
• Long-term savings
Additional Reading: Home Loan: Should it be considered a good debt or bad debt?
Hopefully, you now have a better understanding of banks and HFCs. Make sure you always compare your options carefully and do a thorough research before finalizing your loan.