Why Housing Finance Companies Charge Higher Interest Rates Than Banks

Home loans are provided to customers by nationalized banks and some non-bank finance companies (NBFCs) registered as housing finance companies (HFCs). All these institutions are regulated by the Reserve Bank of India (RBI). However, the interest rate on home loans charged by HFCs is higher than that charged by banks.

According to Finance Minister Nirmala Sitharaman, HFCs charge higher interest rates because they usually raise funds from the market or other lenders. In contrast, banks obtain funds at lower cost because they have access to foreign currency accounts and deposits in zero or zero interest savings accounts. The finance minister said so recently in a written response to a question posed to the Rajya Sabha.

The question sought the government’s response on: “Whether the government is aware that some non-bank financial corporations (NBFCs) charge about double the interest rate on home loans compared to nationalized banks of people residing in the levels 1,2 and 3 cities.

In response to the query, Sitharaman said, “As informed by the National Housing Bank (NHB), the interest rate charged by HFCs starts from 6.50% per annum As the Reserve Bank of India (RBI) has deregulated interest rates, rates are determined based on Board approved HFC policies. The interest rate charged to an individual borrower depends on various factors such as cost of funds for HFC and other variables which among others include borrower profile, credit history/score, stability income, loan amount, loan term, etc.

“NHB informed that the interest rate charged by these HFCs is generally higher than that charged by banks, as banks have access to checking accounts and savings accounts at zero or low interest rate, this which results in a lower cost of funds for them, whereas HFCs typically raise funds from the market or other lenders,” she added.

The RBI guidelines, issued by circular dated February 17, 2021, cover the regulation of excessive interest charged and the code of fair practice for HFCs.

“In accordance with this circular, the board of directors of each HFC adopts an interest rate model taking into account relevant factors such as cost of funds, margin and risk premium and determines the interest rate to charge for loans and advances Interest rates and risk grading approach, and penalty interest should be disclosed to borrowers in the application form and in the sanction letter in addition to being available on their website web or published in newspapers,” Sitharaman said.

“Furthermore, HFCs were instructed to put in place an internal mechanism to monitor the process and operations to ensure adequate transparency in communications with borrowers,” she added.