All you need to know about NBFCs Buying Guide

What is an NBFC?

Non-Banking Financial Company also known as NBFC company, functioning as per the Indian Companies Act, gives out loans and advances to the public.

After banks sheared their lending to the real estate sector in the past couple of years, developers received nearly half of their funding from NBFCs. Unlike Banks, NBFCs are not rigid and lend to even those borrowers who might not have a bank account, credit history or tangible assets. They have been differentiating themselves from the banks by forming personal relations with customers despite charging up to 2% higher interest rate.

Understanding NBFCs:

NBFCs i.e. Non-Banking Financial Companies are not banks, but they are engaged in lending and other activities, similar to that of banks like providing loans and advances, credit facility, savings and investment products, trading in the money market, managing portfolios of stocks, transfer of money and so on.

Nearly 11,000 of India’s NBFCs are small and medium-sized businesses with an asset base of fewer than 5 billion Rupees. According to Motilal Oswal Financial Services, the infrastructure, residential and commercial properties are the largest receivers of NBFCs lending, comprising more than 70% of their loan portfolio.

Large NBFCs are setting up units to extend small-ticket loans to home buyers targeting low-income customers across the country. Firms are offering loans of Rs. 2-6 lakh to borrowers with a monthly income of Rs.6000 – 12000 who find it difficult to borrow from the commercial banks. Firms offer easier know-your-customer (KYC) norms such as relaxation in documentation requirements to facilitate easy access to low-income borrowers.

Advantages of obtaining a home loan with an NBFC:

Lesser documentation – NBFCs require much lesser documentation for home loans as compared to banks. This means that there is a higher chance of getting your loan request approved.

Accessible to individuals with low credit – As we know that banks are more strict when it comes to the procedure of loan approval. This is true with regard to a credit score as well. Banks provide housing loans only to individuals that have an ideal credit score. NBFCs, however, are open to the idea to lend money to customers that do not have an excellent credit score. However, the rates of interest might be higher for individuals that have a low credit score.

Faster processing – Banks usually take a lot of time to process a housing loan. Non-Banking Financial Companies processes a loan faster than banks.

Quick disbursement – All the points mentioned above results in a faster disbursement of the loan.

More accessible –  NBFCs have lesser regulations to follow as compared to a bank. This in turn helps in making home loans more accessible to borrowers and the approval process simpler. However, the loan amount will be lesser than that of a bank.

Current scenario of NBFCs in the real estate sector:

Over the last three financial years, the share of housing and commercial real estate in NBFC lending has suddenly gone up, especially with banks backing down on this sector. Affordable housing is benefitting by the existence of NBFC’s. It is easier for a person to seek home loans of the smaller amount and invest in their

NBFCs are significantly dependant on External Commercial Borrowings (ECBs) for funding these days.

CONCLUSION:

NBFCs are already sweeping changes in financial inclusion, especially microfinance, affordable housing, second-hand vehicle finance, gold loans and infrastructure finance.

Many renowned realty developers have well-diversified portfolios, reduced their debts and ventured into affordable housing where growth is currently the highest. Although obtaining a housing loan with an NBFC has its benefits, always do your research, evaluate your repayment capability, and understand the offer at hand before accepting the loan.