Private Banks vs. State Banks vs. Housing Finance Companies. From whom should you borrow and why?
There is quite a difference in the policies of the public sector banks, private banks and the housing finance companies;when it comes to their policies regarding loan disbursement. Though the standard types of loan remains the same, there are major differences in the internal processes and workingof these three types of institutions. These differences can cause major costs or major inconveniences to the borrowers and therefore the decision for source of borrowing the funds should be taken carefully.
To start with the comparisons, we should first evaluate the differences between a Housing
Finance Company (HFC)and a bank.
• An HFC only provides housing related loans like the homeloans, loans against property, and the construction loans whereas the banks provide different types of loans like personal loans, auto loans as well as home loans.
• The funds that are available with the banks are because of the deposits made by the customers in the current and savings accounts whereas in caseof the HFC, the availability of the funds because of their borrowings from the banks. Therefore,the cost of generating funds is higher from HFC when in comparison with the banks.
• The regulating authority of banks is Reserve Bank of India (RBI) whereas the regulatory authority in case of HFCsis National Housing Board (NHB) which is further regulated by RBI.
• The main advantages in favor of HFC is the leniency in documentation, eligibility and credit score assessment and a quicker loan
disbursement whereas in case of banks the basic benefits include lower interest rates and other long term benefits.
Once the difference between the banks and HFCshas been clarified, we need to evaluate the difference between the two basic branches of banks that is the private sector banks and the public sector banks or the state banks to understand which of the banks types suits the need of the customers’ the best.
• Starting with the initial stages of the fees charged by the banks for processing of theloan. The processing fees for the public sector banksare definitely lower than the processing fees charged by the private banks. Since the public banks do not employ excessive marketing techniques, the charges that they charge for the processing of the loans is generally low and start from 0.25% or simply a fixed amount, whereas in case of the privates banks the fees is higher and generally ranges from 0.5% - 1%.
• Though the private banks charge a higher fee, they ensure better management and faster processing than the public sector banks.they are not bother much about their performance and therefor the speed is low and efficiency marginal.
• Whenit comes to the interest rate policies the state banks have more transparency than the private banks. The private banks tend to increase the rate as instantly as the REPO rate increases but they take their time to reduce the same rate when REPO is decreased, whereas public banks employ the new rates readily.
• The policies of the banks regarding prepayment are also much more lenient and involve almost no cost in case of the public sector banks. Whereas when we talk of the private banks, they very rarely allow prepayment and even if they do, it is not before six months of the start of theloan period and with stringent stipulations regarding the
prepayment moreover it involves a considerable prepayment charge too. The same charges and discomforts are not present when the prepayment is made towards the loan from a public sector bank.
• Another unnecessary charge that is attributed to dealing with the private sector banks includes the charges for dealing with the branch office. Most private sector banks charge an amount of Rs.100 plus service tax for entertaining you a their branch after a certain number of visit whereas in case of the public banks you can visit the branch n number of times free of cost.
When it comes to borrowing money, it isclear that a loan is taken when the borrower is short of cash and therefore any loan which implies least burden or has low cost on the shoulders of the borrower should be preferred. But inmany cases the simplicity of the procedures, the easy eligibility and documentation and speedy and efficient transactions also influence the customer to head for loans which charge a little extra. To conclude, it is on the needs and the requirements of the customer that he should choose the right form of institution for borrowing the loan.