NBFC vs. Bank Home Loans in India: Which is Safer and Better for You?

Home loans require large financial commitments, so deciding who will finance the home is an equally important decision. When looking for a lender in India, borrowers often have to decide between banks and NBFCs.

Recently, it has been observed that most people are opting for a home loan from an NBFC. This is because it has been found that when one compare the best home loans, these institutes offer benefits that attract potential homeowners.

However, the glaring question is – are they safe? This article goes into detail to analyze the nuances of NBFCs by assessing their benefits, disadvantages, and safety as a source of lending.

What are NBFCs?

NBFCs are institutions that are financial in nature. It is similar to the way a bank offers loans. However, unlike banks, these do not have any kind of banking license and hence fall under the regulations of RBI under a separate framework.

Examples of popular NBFCS are Bajaj Finserv, Tata Capital, and Aavas Financiers.

What are the key differences between banks V/s NBFCs?

Parameter	Banks	NBFCs
Deposit acceptance	Accept both time and demand deposits	Can’t accept demand deposits
Credit creation	Credit is created through fractional reserve banking	Limited credit creation capabilities
Government guarantee	Government insurance schemes are available to guarantee deposits	No guarantee is available
Loan approval speed	Slower due to stringent checks	Faster because of flexibility in terms of eligibility and documentation requirements
Interest rates	Lower for high credit scores	Slightly higher
Eligibility criteria	Strict	More inclusive
Loan customization	Moderate	High
Regulation	Highly regulated	Less stringent

What are the advantages of taking a home loan from an NBFC?

• More inclusive eligibility criteria

When it comes to approving loans, NBFCs are usually a lot more inclusive and flexible than typical banks. They offer loans to more people, and this is what makes them ideal for freelancers, self-employed people, and even individuals with irregular incomes.

• Personalized loan products

NBFCs offer customized loan offerings, and this is their core strength. They go above and beyond to ensure their offerings cater to the specific needs of their customers.

Their personalized loan offerings are sometimes in the form of interest rate discounts for women or step-up EMIs.

• Sanctions and approvals are faster

Efficiency is at the core of what NBFCs do, and with this in mind, these financial institutions disburse loans much faster than typical banks. This is why borrowers seeking quick funding to buy a home reach out to NBFCs.

• High Loan-to-Value Ratios (LTV)

NBFCs offer a higher LTV ratio. This means that borrowers can finance a higher percentage of their property value.

• Competitive interest rates for niche segments

NBFCs are ideal for individuals with unconventional income sources or even low credit scores because they offer competitive rates that banks cannot match.

• Availability of freebies

Top Up, Interior Loans, and other freebies on top of the regular loan are offered by NBFCs.

Drawbacks of acquiring a home loan from NBFCs

• Higher interest rates

While the rates are competitive for niche segments, the same isn’t true for salaried individuals with a good credit score. Banks are considered a much better option.

• Limited regulatory oversight creates a higher risk

Unlike banks, NBFCs do not operate under strict regulatory frameworks. RBI monitors NBFCs, but the rules are much more flexible. This is seen as a double-edged sword. For individuals with a low-risk appetite, taking a home loan from a bank is a much better option.

• Risk of financial instability

The IL&FS crisis and other instances of financial instability among NBFCs have created an air of uncertainty. A major concern is their long-term reliability.

It is important to do your due diligence so you can make an educated decision.

• Less value-added services

Home loans by banks are sold with other perks, such as credit card benefits and insurance. These value-added services might not be present if you acquire a home loan from an NBFC.

• Limited geographical coverage

Banks have wide branching networks across the country, which makes them accessible even in distant and rural places.NBFCs do not have such wide branching networks.

How safe is it to take a home loan from an NBFC?

It is essential to consider your risk appetite and specific requirements and do your due diligence before deciding to apply for a home loan from an NBFC. Due to the limited regulatory oversight, it cannot be said for certain that taking a home loan from an NBFC is completely safe.

However, for your safety, you must consider the following before applying for a loan:

• Regulatory safeguards

To maintain transparency and financial health regarding the way NBFCs operate, RBI has introduced some provisions.NBFCs are advised to follow these regulations, which were made stricter after 2018.

• Credit ratings

Check whether the NBFC has a sound credit rating from ICRA or CRISIL. This is an indication of their long-term stability.

• Borrower’s profile

NBFCs might be a safer and more viable option for people who don’t have a regular income profile or lower credit scores, as they do meet the requirements of such groups well.

• Loan tenure and costs

Before making a decision, do not forget to compare the interest rates, long-term costs, and fees between NBFCs and banks.

Who should apply for an NBFC home loan?

An NBFC home loan is the best choice if:

• You are a self-employed individual or have irregular income sources.
• You need fast sanction and loan disbursal.
• You require a higher LTV ratio or a special loan product.
• Your credit score doesn’t meet the minimum requirement set by banks.

Safety tips for a smooth loan experience with NBFCs

• Find trustworthy lenders

Choose reliable, well-known NBFCs with good credit scores and a history of trust. Do not forget to go through customer reviews.

• Compare offers

Compare the interest rates, fees, and other charges from multiple lenders, including banks.

• Do not forget to read the small letter print

Pay attention to the fine print in the loan agreement, which should, therefore, ensure that you understand all those terms and conditions.

• Observe and learn regulatory updates

Read up on regulatory updates that determine how those NBFCs should live.

• Monitoring financial solvency

Check the financial health of the NBFC by reviewing its annual reports and market reputation.

Summing up

In the Indian lending scenario, NBFCs have emerged as a critical choice. This is especially because of their unique offerings and unrivaled benefits offered to unconventional borrowers who are generally rejected by banks. Although taking a home loan from an NBFC involves some risks, proper research and selecting a trustworthy lender can help mitigate them.

However, the final choice between an NBFC and a bank depends on your preferences, financial needs, long-term goals, risk tolerance, and credit score.