Many of us are always confused whether to buy a home loan from a government bank or a private bank.
Special feature…
A public sector bank or a private bank has its own specialty. Public sector banks often keep the loan interest and consideration charges low. Also, they don’t show too much difficulty in repaying the loan. At the same time, private banks are quick to offer home loans and are technologically advanced.
Interest rates on loans in public sector banks are much lower. The reason is that their cost of funds is very low. The reason is the presence of large number of savings, current accounts and pension accounts. So they can provide home loan at low interest rates.
Not so with private banks or private housing companies. They offer home loans by collecting deposits from the general public or raising funds through other means. As a result, interest on loans is high among them. Even so, many people can be seen taking home loans from them.
What’s the problem?
What is the problem in public sector banks? In general, there is a shortage of manpower in public sector banks. A home loan disbursement department exists only in some banks. For home loan borrowers, the work should be done by an employee in some department. Due to this, the delay starts and many problems arise.
Private banks, housing societies and financial institutions play an active role in housing loans.
These work with the target of giving such amount of home loan per month. Also, incentives are given to those employees according to the loan provided. As this incentive is distributed to all the officers and agents, they are active and give home loans faster.
Excellent service…
Due to high cost of raising funds for private banks, they are not able to offer loans at lower interest rates as compared to public sector banks. But many people are looking for private banks because of the excellent service they provide. Home loan procedures are fast in private banks, housing companies and financial institutions.
They go to the client’s office, collect documents, take xerox of documents, get legal opinion from lawyer, and get appraisal report from engineer. As per the convenience of the customer, they visit the home even on holidays and provide the necessary assistance to avail the home loan. But in public sector banks, you can meet and talk to them only when their employees say so.
Many opt for a private bank, housing association or finance company despite the high interest rates due to the fear of hassle and waiting. Government banks are also now gaining momentum as the home loan market is more competitive than ever. Due to this, it does not take many days to get a home loan as before.
Survey result…
A year ago (August 2021), fintech company Basic Home Loan conducted a survey on home loans in top 25 cities of India. Out of this, 47% have expressed that they prefer to take home loans through public sector banks. 27% said to take home loan from private bank. A surprising 24% said they would like to buy a home through savings and investment. Only 1% respondents said that they prefer to take home loan through non-banking financial institution.
Banks’ action during interest rate cuts…
Let’s see how public sector banks and private sector banks have fared when RBI cut interest rates. Between February 2019 and November 2020, public sector banks have reduced interest by an average of 0.94 percent for existing home loan borrowers. At the same time, private sector banks have declined by an average of 0.54%. During the same period, public sector banks have reduced interest on new home loans by an average of 1.51%, while private sector banks have reduced by an average of 1.76%. Between March 2020 and November 2020, public sector banks have reduced the interest on new home loans by 0.68%, while private sector banks have reduced it by 1.34% during the Covid-19 pandemic. Public sector banks offer a discount of 0.69 percent to existing borrowers. At the same time, private sector banks have declined by an average of 0.59%. In other words, when RBI cuts interest rates, private sector banks profit by not cutting interest rates too much. At the same time, interest rates on new loans have been reduced drastically to attract new borrowers. It cannot be said that all private banks have behaved similarly. This is an average calculation.
Link with repo rate…
RP for this problem. I have been resolved. That is, variable home loan interest is linked to the repo rate. Therefore, henceforth, the home loan interest rate will also change according to the repo interest rate change. Many people are getting a home loan from a public sector bank or a private bank, lured by the attractiveness of less than 10% interest. It was only the first couple of years. There is a risk of interest rate hikes in the coming years. So, don’t just look at interest.
Interest varies with demand and supply. Also, when providing home loan to a large number of people, whether it is a private bank or a public sector bank, it is profitable to provide home loan at a low interest rate. Many banks have other income besides interest income. Examples include consideration fee, documentation fee, service fee etc. It has been decided to give a home loan. The faster it is paid, the more interest the bank will earn.
We have mentioned the pros and cons of private and government banks in taking a home loan. Now it’s up to you to decide!
(Let’s buy our own house)
Higher interest rates: Will it affect demand for housing?
Bank of Baroda Research Unit has published a report titled Housing loan scenario in India. Out of which, RBI has increased interest rates by 1.4% in short term. As a result, banks and housing finance companies have increased interest rates on home loans. This will not affect the demand for housing. The reason is that most individuals understand that home loan interest is subject to fluctuations throughout the entire tenure of the loan.
After the Corona outbreak, the demand for housing in India is increasing. There has been an increase in taking home loans from public sector banks, private sector banks and financial institutions. RBI and the central government have helped the home loan sector a lot by offering concessions on loan installments and reducing interest rates during the Covid-19 crisis. The demand for housing has increased as economic activity has improved and growth has picked up pace. The report said that no one has put off their home buying plans due to interest rate hikes.
The contribution of household debt to the country’s Gross Domestic Product (GDP) was 6.8 percent in 2010-11. This has increased to 9.5 percent in 2020-21. In the next year 2021-22, it increased to 11.2 percent. The housing loan disbursed by banks was Rs 3.45 lakh crore in 2010-11. This has increased to Rs.15 lakh crore in 2020-21. This is a growth of 14.3% per annum. The contribution of public sector banks in the housing loan sector is 61.2 percent in 2020-21. At the same time, this contribution was around 70 percent in 2010-11. During this period, the contribution of private banks to home loans increased from 21.3 percent to 35.2 percent. In 2018-19, the contribution of housing finance companies to the housing loan sector was Rs 6.6 lakh crore, which has increased to Rs 7.1 lakh crore in 2020-21.