Banks vs Housing Finance Companies

How banks and specialised housing finance companies compete in home lending, who they serve, and how regulation of HFCs changed after failures.

Home loans in India come from two main types of lenders: banks and housing finance companies (HFCs).

Banks

Large banks like SBI, HDFC Bank and ICICI Bank dominate home loans. Advantages:

Cheap deposits as a funding source.
Lower interest rates for salaried borrowers with good credit.

Housing finance companies

HFCs specialise in home loans. Examples include LIC Housing Finance, Bajaj Housing Finance and many affordable housing lenders.

They often serve:

Self-employed borrowers without formal salary slips.
Lower-income and semi-urban customers.
Borrowers banks consider riskier.

They fund themselves through bonds, bank loans and refinance, so their costs are usually higher.

The HDFC merger

HDFC Limited, India’s pioneering HFC founded in 1977, merged with HDFC Bank in July 2023, creating one of India’s largest financial institutions and showing the advantage of deposit funding.

Failures and regulation

In 2018-19, after the IL&FS default, funding for HFCs dried up. DHFL, a large HFC, collapsed amid fraud allegations and went through insolvency. Regulation of HFCs moved from the National Housing Bank to the RBI in 2019, bringing them closer to bank-like rules.

Choosing a lender

Compare interest rates, processing fees, service and flexibility. Salaried borrowers with good credit often get the best rates from banks; others may find HFCs more accessible.

The self-employed buyer

A shop owner with irregular income struggles to get a bank loan because he lacks salary slips. An affordable housing finance company assesses his business cash flows and approves a loan, at a slightly higher rate.

Thinking banks and HFCs are the same

HFCs specialise in housing, serve different customers and rely on market funding rather than deposits.

Key takeaways

Banks dominate home loans using cheap deposits.
HFCs serve self-employed and lower-income borrowers, with higher funding costs.
HDFC merged with HDFC Bank in 2023.
After DHFL's collapse, HFC regulation moved to the RBI in 2019.