BANK Vs NBFC which is best for Availing Home Loans?
Hi! Welcome to all about Money - Investments and Loans from Login4loan. First let’s understand fundamental difference between financial institutions called Bank and NBFC.
As we all know Bank does transaction of funds involving public by accepting deposits and lending loans. Hence the major source of funds are from public. Since the funds are raised from public, the lending policies of loans are strictly controlled by RBI, ultimate controller of financial Institution in India and NHB (National Housing Board). Classical example of Banks are Axis Bank Ltd, ICICI Bank Ltd, SBI, IOB, Indian Bank. Etc.,
NBFC's are financial institutions who don't carry out banking operations. They have huge funds on their own and they lend money. They have to get license from RBI to run business and effectively controlled by NHB (National Housing Board) when it comes to home loan funding. However lending rates are not strictly controlled by RBI because funds source are not from public. Hence they can fix the rate little higher side. They need not to maintain homogeneity. That is NBFC's can maintain different rate for same set of customer profile. Classical example. HDFC Ltd, LIC HFL, TATA Capital, DHFL, PNBHFL, etc.,
History of Lending rate Methods
BPLR/PLR (Prime Lending Rate)
In 2003 RBI introduces BPLR (Banking Prime Lending Rate), which is guideline prescribed by RBI for computing loan interest calculations. This is the maximum rate at which institution can lend however they can give discounts to accommodate good customers. RBI expected financial Institutions to deploy fair practice and pass on benefits to customers as and when it lending rate. BPLR includes banker’s margin and cost of funds.
BASE Rate + Markup
Since the BPLR method is not transparent and Banks failed to pass on benefits, from July 2010 RBI introduced new method. Till July 2016 Both Bank and NBFCs were following same interest rate methods called BPLR (Banking Prime Lending Rate) or PLR (Prime Lending Rate).
Post July 2010 RBI instructed all the banks to follow Base rate + Markup. Which is more transparent system and RBI wants the customer should get benefit immediately as and when RBI revises rate. Every bank has their own unique Base Rate which is cost of funds and Bank can add markup which is their margin based on Customer profile. For Example Best customer profile may get Base Rate + Zero Mark up and Bank cannot lend less than Base Rate.
Remember NBFCs still follows PLR method. Hence they can do differential pricing. That is for new customer they can offer at lesser rate later they can increase irrespective of RBI rate trend. However in Bank Base Rate remain common for all existing customers as well as new customers. Hence Base rate offers better benefits to the customers.
When Rate reduced by RBI, Base rate will change for the entire portfolio in Bank if bank revises its rate meanwhile in PLR it doesn't apply. Customer should walk in to the NBFC customer care and make request and there will be charges like 5,000+ ST.
MCLR (Marginal Cost of Lending Rate)
Base rate improved customer benefit still there was a gap in implementation. When RBI reduces lending rate normally it doesn't change immediate. Again Bank had mixed portfolio Short term, Midterm and Long term loans. They cannot revise long term loan at shorter intervals at the same time long term loan customer cannot afford to lose the rate benefit.
Hence RBI recently implemented new system. Almost like Base Rate but with term attached to it. Bank can offer different MCLR rate for different period of reset. Customer will be given MCLR+ markup along with "Time Period". That is MCLR + Markup everyday rate change, 15 Days, One month, three months, Six months and one year.
If a customer takes a loan in April 2016 and he opts 6 months Rate revision. Hence at Sixth month his MCLR will be changed based on prevailing rate on completion of sixth month. The Customer rate is fixed for 6 months. Based on product tenure bank will offer at different fixed period. Like ICICI Bank is offering at 1 year tenure for Home loan customer and Axis is offering for 6 Months tenure.
Whenever RBI reduces/increases rate new customers will get new rate. These rates to be published online. All the existing portfolio customers will get rate revision end of their pre-decided tenure. For example all Axis Bank customers rate will be rest at the end of 6 Months and ICICI bank customers should wait for one Year.
Existing Customers who is in Base Rate can shift to MCLR rate and they need to sign additional agreement.