Government Bank Vs Private Bank Indian Loan Difference

Compare Loan from private vs public bank India. Public banks offer low processing fees, faster reduction in interest rate with RBI REPO rate reduction, no pre-payment charges and no pre-payment period restriction. Private bank have faster processing, good customer care but high interest rates and charges.

Written by Anil Gupta
  By Anil Gupta          Updated  21 Jul, 19

  36    


The difference between taking a loan from public sector bank and a private bank is huge. The young generation always prefers private banks whereas our parents would always guide us to get it from a public sector bank.

I would take an example of a home loan to compare the two types of banks since most of the terms and conditions remain same for all types of loan.

NRI settled or working in countries like US, UK, Canada or Australia also prefer private bank home loans due to their ease of approval and online application process. Note that if you cannot visit India personally for signing bank loan papers or registering the property, you will need to create a special Power of Attorney attested by Indian Embassy. Most states in India require that POA should be registered in India too. Find Sample Power or Attorney here.

We compare Private Sector Bank (E.g ICICI, HDFC, Citibank etc.) with Public Sector Bank (E.g. SBI, PNB etc.) to understand their loan policies.

1. Bank Processing fees

This fees is charged to analyse, evaluate and do the paperwork for your loan processing. Even though the bank is selling you the product, they don’t take this cost on them.

Private Bank

Method 1: Lump sum amount based on the amount of loan (e.g. INR 5000 for loans upto 20 lakhs)
Method 2: Percentage of the total loan amount (0.25% of the total loan amount).

Most of the private sector bank depend on the their DSA (Direct selling agents) to get the loan consumer to their doorstep, they generally keep this fees high (like 0.50% – 1% ) to pay a cut of this fees to their agents.

Government Bank

They are NOT aggressive in entertaining DSAs and hence have their processing fees generally low and starts from 0.25% or a fixed amount.

So, approach them directly if you want to save some money.

 

2. Paper work, efficiency and turnaround time

Private Bank

Better management and faster processing times than their counterparts. Their DSA’s have strict sales target every month and hence move faster to reach sales goals.

Government Bank

They are NOT bothered about their performances most of the time. So, they move a lot slower but are steady in their process.

 

3. Interest rates fluctuation

Private Bank

Interest rates are increased by private bank as soon as RBI (Reserve bank of India) increases its REPO rate, but do NOT decrease with same speed at least for existing loan customers.

Government Bank

The interest rate policies are more transparent in public sector banks than private banks.
They keep same policies for all loan customers and decreased rate is effective for existing customers also almost immediately.

 

4. Prepayment charges

Private Bank

Read the terms and conditions carefully, they DO NOT allow you to prepay the loan without the prepayment charges. Obviously, they are loosing interest money if they allow you to prepay.

So, to mitigate the loss, they generally charge you 2% of the OUTSTANDING loan.

Yes, I said OUTSTANDING. i.e. if you have an outstanding loan of 10 lakhs and you are making a pre- payment of 2 lakhs, you need to pay them 2% of 8 lakhs as pre-payment charges.
That’s a whopping Rs. 16,000 penalty to reduce your loan by 2 lakhs.

Government Bank

Public sector banks do NOT charge you a penny to prepay (read their terms and conditions). So, they score a plus point for me here.

 

5. Prepayment Period

Private Bank

Normally, they add a clause that you cannot pre-pay ANY amount before completing 180 day (6 months) of your loan. Clever…because the EMI’s are designed in a way that the interest portion is maximum at initial stages of loan, this helps the bank earn maximum interest before you actually make any pre-payment.

Government Bank

Good news: They do NOT have any such clause. You can start pre-paying from day 2 of loan itself.

At-least I do not know of any bank which has a minimum period clause in this space. Another big plus towards public sector banks.

 

6. Pre-payment Penalty Amount

Private Bank

They are too concerned about pre-payments as it is a loss of income. Generally, you cannot pre-pay more than 25% of outstanding loan in a single year. i.e. if you have taken a loan of 10 lakhs, you cannot pre-pay more than 2.5 lakhs in a single year.

Government Bank

Again, no such clause here. You can pre-pay any amount which you like.

This is helpful if you have got some lump sum amount from some other source of income and want to reduce your loan.

7. Charges for dealing in branch office

Private Bank

Got the loan, but don’t come to branch. If you do, you will be charged for any transaction you do at their branch. Most of the private sector banks charge an amount of Rs. 100 plus tax for entertaining you at their branch after certain number of visits.

They want you to use their ATM’s and online banking to transact. Off course, it saves their operations cost.

Government Bank

No such policy here again. Visit them any number of times and they will be able to help you.

 

Choose Private Bank or Government bank for home Loan?

After all, a loan is a product that the bank is selling to its customer i.e. you. They need to make profit out of it else, it does not make any sense to do business for them.

But as a customer, you should try to buy a product whose cost is as low as possible in both short and long term. So, make a wise decision considering the above facts.

My suggestion is to get a home loan from SBI and use their Maxgain account as it helps you save a lot on interest.

There are lots of charges involved in a loan which are incurred at the beginning and over a period of time. Smaller tenure loans do not hurt much but for home loans, where the tenure is generally 20 years, you should take great care for the above mentioned points.

For example, if you really want to close the loan much earlier than the actual loan tenure by making pre-payment occasionally, you should keep the pre-payment charges, period and amount in mind.

You may want to go through the costs of buying an Apartment in India with government taxes piling a huge cost on your pocket.


Finance
 






   36 Useful Questions & Answers from comments



  1. Abhik Banerjee
    Abhik Banerjee 7 Mar, 19 at 3:18 am

    Hi,
    I need a clarificantion regarding Axis bank SHUBH ARAMBH HOME LOAN scheme, where they waive off 4 no of EMI after completion of 4th, 8th & 12th year, provided EMIs are paid regularly on time.

    My question is where are they actually adjusting this WAIVED OFF amount.?


    • Anil Gupta
      Anil Gupta 7 Mar, 19 at 9:27 am

      I cannot help you with specific bank scheme. Please ask the bank for clarification.


  2. Nalanda Chavan
    Nalanda Chavan 18 Dec, 18 at 12:52 am

    I’m planning to buy a house . Yest we payed token. Having too many doubts. Which is the best public sector bank for home loan for women


    • Anil Gupta
      Anil Gupta 18 Dec, 18 at 7:07 am

      As per my opinion, SBI and PNB are better than others.


  3. Vicky shivne
    Vicky shivne 5 Nov, 18 at 7:50 pm

    Sir i want to know that how many cost and which type of cost we should have to paid from our loan payment in govt and private sector bank
    Actually i had taken 200000 loan from icici bank bt i got only 1,89,000 rupees from it so i want to know which type of cost charge from my loan payment please tell me


    • Anil Gupta
      Anil Gupta 5 Nov, 18 at 8:29 pm

      Please ask the bank about which costs they have deducted. They will give it you in writing.


  4. Sushant Srivastava
    Sushant Srivastava 5 Apr, 18 at 9:13 am

    govt banks will take ages to disperse loan.
    but they will also be able to catch property frauds,incorrect agrreemnets registed by builders and other fraudulent activities behind the scenes.
    I wud suggest any public banks for home loans.their background check will make sure that ur property is legal and u can seell that in future too without any hussles


    • Anil Gupta
      Anil Gupta 5 Apr, 18 at 9:17 am

      I agree.


  5. Sushant Srivastava
    Sushant Srivastava 5 Apr, 18 at 9:14 am

    govt banks will take ages to disperse loan.
    but they will also be able to catch property frauds,incorrect agrreemnets registed by builders and other fraudulent activities behind the scenes.
    I wud suggest any public banks for home loans.their background check will make sure that ur property is legal and u can seell that in future too without any hussles


    • Anil Gupta
      Anil Gupta 5 Apr, 18 at 9:18 am

      I agree.


  6. Sandesh
    Sandesh 3 Apr, 18 at 3:37 am

    Hello Anil
    there is one more point that needs clarification.. now a days when we go to buy apartments we need to give token advance for just seeing and checking the Property Papers from a lawyer for legal advice before decision so one of my friend paid 50,000 as ADVANCE just to see the papers and came to know that there is some deviation in the property legality , how effective does a private bank or nationalized bank check the legality of property before giving loan ? can we take a decission based on the work from bank , for EG if SBI, canara bank have already given loan on other houses on same building then is it safe to proceed ? because have heard cases for private banks give loans on illegal property also w/o much back ground verification
    this might be a topic out of this posts but would expect your advice


    • Anil Gupta
      Anil Gupta 3 Apr, 18 at 5:49 am

      The banks have on their payroll or hire third party property lawyer/consultant for property papers verification.
      But, the onus is still on the buyer to do the due diligence.

      Government bank’s paper checking is still better than private banks and they would most probably not give loan if there is something wrong with property chain.
      In my opinion, it is reliable.

      If a bank has given loan on some flats in a building, then it is safe to assume that property is good.


  7. Sandesh
    Sandesh 3 Apr, 18 at 3:38 am

    Hello Anil
    there is one more point that needs clarification.. now a days when we go to buy apartments we need to give token advance for just seeing and checking the Property Papers from a lawyer for legal advice before decision so one of my friend paid 50,000 as ADVANCE just to see the papers and came to know that there is some deviation in the property legality , how effective does a private bank or nationalized bank check the legality of property before giving loan ? can we take a decission based on the work from bank , for EG if SBI, canara bank have already given loan on other houses on same building then is it safe to proceed ? because have heard cases for private banks give loans on illegal property also w/o much back ground verification
    this might be a topic out of this posts but would expect your advice


    • Anil Gupta
      Anil Gupta 3 Apr, 18 at 5:50 am

      The banks have on their payroll or hire third party property lawyer/consultant for property papers verification.
      But, the onus is still on the buyer to do the due diligence.

      Government bank’s paper checking is still better than private banks and they would most probably not give loan if there is something wrong with property chain.
      In my opinion, it is reliable.

      If a bank has given loan on some flats in a building, then it is safe to assume that property is good.


  8. Gopal Rajawat
    Gopal Rajawat 10 Nov, 17 at 3:40 am

    Super userful information, thank you so much !


    • Anil Gupta
      Anil Gupta 10 Nov, 17 at 7:31 am

      You are welcome.


  9. guffy Wave
    guffy Wave 2 Mar, 17 at 3:40 am

    Thanks for sharing the knowledge – love Gufran Khurshid


  10. PRAVEEN
    PRAVEEN 31 Oct, 15 at 10:47 pm

    AS AN INSIDER(PSU BANK EMPLOYEE) I CAN SURELY TELL YOU THAT WHAT YOU HAVE WRITTEN IS BULLSHIT. YOU HAVE WRITTEN ONLY GENERAL LOGIC WHICH ANYONE CAN THINK IN HIS SPARE TIME. THE ACTUAL BANKING IS WAY DIFFERENT.


    • Anil Gupta
      Anil Gupta 1 Nov, 15 at 6:00 am

      Hi Praveen,
      This article is meant to highlight the outside view of bank from a customer’s perspective. What happens inside the banking system is none of the customer’s concern.

      Also, writing all text in capital letters and using foul language does not make your intelligence credible about banking system.

      If you reply with same language again, our system would mark it as spam.


  11. suresh
    suresh 10 Jul, 12 at 1:07 am

    thanks for helping me to take a wise decision


  12. B Rupera
    B Rupera 17 Feb, 12 at 12:03 am

    Great Article. Thank you very much for educating us


    • Anil Gupta
      Anil Gupta 17 Feb, 12 at 12:57 am

      Thanks B Rupera, I collected this information when i myself struggled for taking a loan. I hope it helps you too.


  13. Ravi Prakash Sheshappa
    Ravi Prakash Sheshappa 24 Sep, 11 at 4:15 pm

    Great info. I am reading this again, but made complete sense of many articles now. I happened to stumble on your articles through Rediff’s ‘GetAhead’. First when I read your article on Loan eligibility and Net pay relation, didn’t understand. Similarly, this one too.. Somehow, when I am reading again, it looks and makes a lot sense. Thanks for article.


    • Anil Gupta
      Anil Gupta 25 Sep, 11 at 12:04 pm

      Thanks Ravi for writing in.
      I appreciate your comment. I hope you will enjoy reading more articles.


      • ajit
        ajit 21 Nov, 17 at 11:33 pm

        Sir, what is different between PNB and PNB Housing Finance ? May you please help ?


        • Anil Gupta
          Anil Gupta 21 Nov, 17 at 11:37 pm

          PNB Housing Finance is a wholly owned subsidiary of Punjab National Bank (PNB). They are just two separate companies.
          PNB housing finance only deals with home loans and NO retail banking.


          • Ashish Shende
            Ashish Shende 24 Feb, 18 at 4:07 am

            Sir, Is PNB housing belongs to Public Sectot?


            • Anil Gupta
              Anil Gupta 24 Feb, 18 at 10:48 am

              Yes, PNB housing is part of public sector bank.


  14. Jitendra Kushwaha
    Jitendra Kushwaha 1 Aug, 11 at 10:40 pm

    How about moneysaver facility. I mean if you have spare money and you keep it in you bank amount you dont have to pay interest on that amount. I find it very useful and it is available with some of private banks.


    • Anil Gupta
      Anil Gupta 2 Aug, 11 at 1:20 am

      Yes..You are right. The facility you are talking about is mostly available in Home loan schemes. This scheme is available with both private and government banks.


  15. Hitesh Sanadhya
    Hitesh Sanadhya 20 Jul, 11 at 8:55 am

    nice info….


    • Anil Gupta
      Anil Gupta 20 Jul, 11 at 12:12 pm

      Thanks Hitesh



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