With HFCs, NBFCs Under RBI Now, What Changes For Home Loan Borrowers?
Experts are divided in their opinion about the virtues of the Reserve Bank of India (RBI) taking charge as the regulator of housing finance companies (HFCs) and non-banking finance companies from its subsidiary-the National Housing Bank (NHB). This move was first announced by the finance minister Nirmala Sitharaman on July 1, 2019.
Governor Shaktikanta Das-led RBI is already following a strict routine to clean up the shadow banking sector after massive defaults by sector biggie Infrastructure Leasing and Financial Services (ILFS) last year indicated an ill- health that could act as a contagion for the entire banking system. The RBI was attempting to prevent any repeat of last year’s crisis, following signs of fragility in some of the 50 HFCs and other non-bank lenders it is monitoring, the governor told media. Through a mix of preventive and enforcement measures, the RBI is expected to make a turnaround, fighting the bigger problem.
A more pertinent question for the common man is, what changes for a borrower who wants to approach an HFC or an NBFC to seek home loan? Here’s how you could be impacted.
Gamut of Options for Borrowers as Interest Rates May Go Down
Borrowers giving importance to interest rates (lower the rate, the better the deal) end up choosing a bank over HFCs/NBFCs as lending rates of the former are invariably cheaper than rates offered by the latter. For instance, interest on housing loans of public lender State Bank of India (SBI), currently are in the range of 8.50 per cent and 9.70 per cent while interest rates on loans of Indiabulls Housing Finance range between 8.8-12 per cent. This differentiation can be attributed to the RBI not regulating the HFCs and NBFCs who did not have it incumbent upon them to follow the lending benchmark used by mainstream banks.
While banks lend money using the marginal-cost of funds-based lending rate (MCLR), HFCs/NBFCs still lend money using prime lending rates. This encouraged them from reducing rates even when the banking regulator reduced rates and nudged banks to pass on the benefits to customers. With the controls vested with the RBI now, HFCs/NBFCs will have to follow the standard lending practices and be obligated to change rates when the RBI does that on its part.
“Lending rates could potentially reduce, while transparency at HFCs/NBFCs will certainly increase with the RBI at the helm. HFCs could see lower cost of funding and there is possibility for the benefit of lower rates being passed on to the borrowers,” a report in the media quoted GIC Housing Finance MD and CEO, Neera M Saxena.
Echoing similar sentiments, the manager of a public bank on condition of anonymity says,” With more institutions offering loans at similar levels, customers have options to pick a lender of their choice. This would increase competition in the market and borrowers will be in a position to negotiate. Banks would launch lucrative offers to make their home loan products more desirable than their peers,” says the manager of a public bank on the condition of anonymity.
No Easy Loans Going Forward
HFCs/ NBFCs aren’t really a hit among the salaried homebuyer, with an above-average credit score* for whom low rates are the key concern. These are a popular choice among individuals having a poor credit score, or insufficient savings to make meet the 80:20 loan-to-down-payment ratio. These were also the choicest destination for borrowing for people who cared not about the rates but needed quick loan disbursals without much paperwork.
With the RBI coming in, the lending processes would be at par with the banking system. This means, a borrower would have to fulfill every condition to get a loan from an NBFC as they would have to do in case of a bank. With greater scrutiny, people with poor credit scores and insufficient documents will find it difficult to get a loan here after.
*A credit score between 300 and 600 is considered risky by financial institutions. A score above 700 is considered no-risk zone.