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NBFC vs Banks: The Best Option for Getting Loans in India

NBFC vs Banks
Shivi Gupta
| Updated: Jun 10, 2020 | Category: NBFC, RBI Advisory

NBFC vs Banks: A person or business venture may require financial assistance at an important stage of their personal or professional life. The Indian banking and financial sector has played an essential role in streamlining credit for the masses. The traditional banking sector ruled the lending sector in India for more than decades. A majority of the general public was unsure about availing credit, both secured and unsecured, but found a reliable source of finance in banks. However, conventional banks have recently found a strong competition in Non-Banking Financial Companies (NBFCs). This guide lays down in detail, the difference between Banks vs NBFCs in India and which option is best for getting loans.

Meaning of NBFC vs Banks

Meaning of Banks

Banks are financial institutions which are authorised by the government to execute banking activity such as acceptance of public deposits, granting of loans, management of withdrawals, cheque issue and other financial utility services to bank account holders.

Banks are considered as a focal point of any country’s economy that boost its fiscal growth. Banks guide and dominate the holistic financial segment of a country and act as financial intermediaries. They are the nexus that connect borrowers and depositors.

The Indian banking institutions comprise of public, private or foreign banks that operate in the country. They are also engaged in activities such as granting of loans, maintaining the credit flow, mobilising deposits, secure and time-specific money transfers, and much more. They also provide public utility services, net banking services and mobile banking services, making it easier for their users to move towards a cashless and digital India. The ownership of banks is in the hands of their shareholders and they profit-earning institutions.

Meaning of Non-Banking Financial Company (NBFC)

NBFC or a Non-Banking Financial Company is a financial institution which is involved in private lending to individuals and businesses. An NBFC is a kind of company which is registered under the Companies Act, 2013 and licensed and regulated by the Reserve Bank of India (RBI).

NBFCs are not banking institutions but are engaged in lending activities to individuals and enterprises as per the limitations and guidance provided by the RBI. There are many similarities between the functioning of NBFC vs Banks since they both are engaged in providing loans and advances, savings, credit assistance, etc.

NBFCs are also engaged in providing financial services to businesses for their acquisition of securities, shares, stocks, debentures and bonds which are issued by the government. NBFCs in India also provide services for hire purchase, venture capital finance, insurance, leasing, and housing finance.

Difference Between NBFC vs Banks in India

Though the activities of NBFCs and Banks are somewhat similar, there is a vast difference between their activities, legal obligations, manner of functioning, and much more. Let’s have a look at NBFC vs Banks:

Activities of NBFC vs Banks

The Reserve Bank of India has classified the activities which can be undertaken by the NBFCs. The activities of Non-Banking Financial Companies or NBFCs are different from Banks in the following ways:

  1. NBFCs are not allowed to accept demand deposits like banks.
  2. NBFCs cannot be a part of any payment or settlement system.
  3. NBFCs cannot issue or draw cheques on themselves.
  4. NBFCs cannot provide insurance to the deposits and credit guarantee to its customers.

Rate of Interest

Banks cannot extend credit low the Marginal Cost of funds based Lending Rate or MCLR. Loans provided by banks are also associated with certain macro-economic factors, including the lending rates prescribed by the RBI, international market scenarios, etc.

However, the rate of interest charged by NBFCs is based on the Prime Lending Rate (PLR). The Reserve Bank of India does not regulate the rates charged by NBFCs on their loan products. Rather a limit is prescribed within which NBFCs can charge any rate from their customers.

This provides NBFCs with the freedom to increase or reduce rates of interest on their different loan products to attract a larger customer base. This also benefits the borrowers since NBFCs offer flexible loan tenures and interest rates to their customers.

Eligibility for Loans from NBFC vs Banks

Banks and NBFCs apply different eligibility and risk assessment parameters to accept any loan applications. It is found that banks have stricter eligibility requirements as compared to NBFCs and offer a limited amount of loans to their customers.

Banks only offer financial assistance for a certain portion of the credit requirement, while NBFCs extend loans for almost the full amount of credit needs of their clients. For instance, in case of car loans, most banks only offer 70-75% of the car’s value as loan, while most NBFCs extend 90-100% of the market price of the car.

Also, banks apply stringent demographic requirements to accept any individual or business as their customers. This includes customers belonging to the urban and metropolitan regions, customers who are up to a certain age, with a certain income level. However, the credit eligibility requirements by NBFCs are more lenient, and they tend to target customers even from the rural and urban regions, with limited disposable income, and no credit history.

Dealing in Negotiable Instruments

Negotiable instruments include bills of exchange, cheques, demand drafts, etc. Banks are allowed to issue and accept such negotiable instruments and allow their customers to withdraw money from themselves and other banks as well. However, Non-Banking Financial Companies are not allowed to deal in any form of negotiable instruments.

Documentation for Loan Processing in NBFC vs Banks

Banks have strict requirements for detailed paperwork and document verification before any kind of loan, secured or unsecured, is granted to a customer. Most Banks still rely on manual document verification, and this extends the turnaround time taken to process a loan.

On the other hand, NBFCs have simple KYC and AML documentation requirements, which is also processed digitally by a majority of NBFCs in India. NBFCs allow their customers to submit their loan documents online without the need to visit the brick-and-mortar store and even disburse and collect the loan amount digitally with lesser paperwork as compared with banks. This also reduces the loan processing and disbursement time by a significant margin than banking institutions in India.

Requirements of Credit History

Indian banks rely on a detailed credit history of a loan applicant to assess if the person or business is worthy to receive financial assistance. This, in turn, leads to the exclusion of a large number of credit-wanting entities who do not possess an elaborate credit background or are first-time loan applicants.

Conversely, NBFCs may offer loans, be it for personal or business purposes, even when the applicant does not have a good credit score or even no credit history at all. However, while doing so, NBFCs must ensure that they have a strong default management strategy and risk management policy in order to mitigate any chances of Non-Performing Assets.

Permission to Accept Deposits

Banks are allowed to accept all kinds of deposits from their customers, including demand deposits. They are allowed to accept fixed deposits, recurring deposits, and time-bound deposits. However, NBFCs in India are not allowed to accept demand deposits from their customers. NBFCs can only accept deposits after obtaining a special permission from the RBI and regulating such deposits as per the Master Directors of the RBI.

NBFCs in India are allowed to accept deposits for a minimum period of 1 year and a maximum period of 5 years. Also, NBFCs cannot accept deposits which are repayable on demand. They also cannot offer interest rates more than the ceiling rate laid down and as revised by the RBI.

Insurance Protection on Deposits

Deposits by banks are protected by insurance up to a given limit mandatorily. The bank deposits are insured with the Deposit Insurance Credit Guarantee Corporation. However, no such insurance protection is provided for the deposits by deposit-taking NBFCs in India.

Customised Loan Products

Loan products offered by banks are fixed and do not offer any tailor-made benefits to the customers. The features of the bank loans are fixed, with little to no room for customisation. However, NBFCs offer customised loan products to match the needs of their customers. They offer flexible interest rates, choice of repayment tenure, repayment mode and many other offers and discounts.

Loan Processing Time and Process

The time taken by banks to process is more than the time taken by NBFCs for their loan applicant processing. This is because of the strict verification parameters and manual procedures. On the other hand, most NBFCs operate a hybrid business model, allowing them to process the loan applications received online. The digital loan process also allows a faster disbursement of the loan amount.

Customer Services and Grievance Redressal

Financial services are one of the most commonly availed services by the general public. However, banks and NBFCs may find themselves in a legal conundrum of they do not provide quality financial services and customer grievance redressal services.        The biggest concern for customers is the post-loan services provided by banks. Most customers complain about the lack of customer support services once the loan is sanctioned.

However, in case of NBFCs, customers find end-to-end services for their loan application processing, disbursements, EMI tracking, etc. Most NBFCs also have multiple channels of communication as well, including social media, telephonic and SMS connectivity, email assistance, live chat, etc.

Basic Differences Between NBFC vs Banks

Ground Banks NBFC
Meaning It is a government organisation that provides banking services to the general public. It is a private company that provides services similar to banking services, with certain exceptions.
Registered under Bank registration is done under the Banking Regulation Act, 1949. NBFC registration in India is done under the Companies Act, 2013, with a license to operate as NBFC from the RBI under the RBI Act.
Deposit Banks can accept and issue deposits on demand of the customer. NBFCs cannot accept or issue demand deposits.
FDI FDI in banks is allowed only to a certain limit. FDI in NBFCs is allowed at 100%.
Payments Payments system is a part of the banks in India. NBFCs cannot have a payment system.
Transactions Banks provide assorted transaction services to their customers. NBFCs cannot have a transaction system.

Concluding the Debate of Banks vs NBFCs

The entry of NBFCs in the lending sector turned the credit ecosystem upside-down by serving those who were considered as undeserving by the banks. NBFCs are providing credit in a more expeditious and cost-efficient manner as compared to the banking institutions in India.

The banking sector has failed to address a large section of credit-wanting individuals and businesses that reside in the semi-urban and rural cities. Banking institutions in India extend the limited scope of services to an exclusive market segment.

The growth in the banking industry has also declined due to the increased non-performing assets (NPAs). On the other hand, the NBFCs are witnessing a growth spurt resulting from the inclusive approach they follow while extending their financial services. NBFCs also have superior risk management and planning strategy in place. NBFCs have proven to have a higher performance level when it comes to surviving the liquidity-crippled market and run scalable business operations while providing peerless services.

The NBFCs work parallel to the numerous government initiatives such as the National Rural Financial Inclusion Plan. They supply customised financial services as per the demands of businesses and income-earning individual. NBFCs have proven to be a worthy competition to banks by providing their clients with a financial safety net needed to grow in a severely competitive market.

NBFC players have established a more approachable and inclusive financial model wherein the credit requirements of those who were excluded under the banking system are able to access affordable credit assistance. NBFCs have also played a crucial role in the increase in employment opportunities in India.

NBFCs, therefore, are playing a key role in extending financial assistance to MSME businesses and providing them with the capital assistance they need to expand. With their customisable loan products, hybrid business operations and state-of-the-art technologies, NBFCs have been giving tough competition to the existing banking sector and contributing significantly to the economic growth of the country.

Swarit Advisors can assist you with your NBFC registration, NBFC post-registration compliances, and NBFC collaborations in India. Consult our NBFC experts to understand and execute your NBFC registration strategy effortlessly.

Also, Read:Difference Between Banks v/s NBFCs


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