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Home Loan Interest Rates (Banks vs HFCs/NBFCs): Why Housing Finance Companies charge higher interest rates than Banks

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Home loans are supplied to clients by nationalised Banks and sure Non-Banking Finance Companies (NBFCs) registered as Housing Finance Companies (HFCs). All of those establishments are regulated by the Reserve Bank of India (RBI). However, the interest rate on house loans charged by HFCs is higher than banks.

According to Finance Minister Nirmala Sitharaman, HFCs charge higher interest rates as they sometimes increase funds from the market or different lenders. In distinction, banks get funds at a decrease value as they’ve entry to forex accounts and financial savings accounts deposits at nil or zero interest. The Finance Minister mentioned this in a written reply to a question within the Rajya Sabha not too long ago.

The question sought Government’s response on: “whether Government is aware of the fact that some Non-Banking Financial Companies (NBFCs) are charging approximately double rate of interest on Home loans as compared to nationalized banks from the people residing in tier 1,2 and 3 cities.”

Replying to the question, Sitharaman mentioned, “As informed by National Housing Bank (NHB), the rate of interest charged by HFCs begins from 6.50 % p.a. As Reserve Bank of India (RBI) has deregulated interest rates, the rates are determined based on the Board approved policies of the HFCs. The rate of interest charged to an individual borrower depends on variety of factors such as cost of funds for HFC and other variables which, inter alia, include profile of the borrower, credit history/score, stability of income, quantum of loan, tenor of the loan etc.”

“NHB has informed that rate of interest charged by such HFCs is generally higher than that charged by Banks as banks have access to Current Accounts and Saving Accounts deposits at nil or low interest which results in lower cost of funds to them while HFCs typically raise funds from the market or other lenders,” she added.

The RBI’s pointers, issued by means of a round dated February 17, 2021, cover the regulation of extreme interest charged and truthful follow code for HFCs.

“As per this circular, the Board of each HFCs shall adopt an interest rate model taking into account relevant factors such as cost of funds, margin and risk premium and determine the rate of interest to be charged for loans and advances. The rates of interest and the approach for gradation of risks, and penal interest has to be disclosed to the borrowers in the application form, and in the sanction letter besides making available on their website or published in the newspapers,” Sitharaman mentioned.

“Further, HFCs have been advised to put in place an internal mechanism to monitor the process and the operations so as to ensure adequate transparency in communications with the borrowers,” she added.

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