NBFC

NBFC vs Bank: Are NBFCs Preferred more while shopping for Loans?

Gone is the era when you have to make multiple trips to the banks for availing oneself of the smallest loan, compile multiple documents, and wait for a considerably longer time to get your loan approved by the bank. With the advent of Non-Banking Financial Companies (NBFCs), the advancement of your monetary needs has become much easier. The easy accessibility and remote coverage make NBFCs a lucrative option in the hands of the borrower. This article shows the difference in NBFC vs Bank.

Difference: NBFC vs. Bank

The difference between NBFC vs. bank can be deduced by the following:

• Authorization

NBFCs aren’t obliged to hold banking license^[1] to provide banking services to the public. When it comes to banks, they are authorized by government and serve the public.

• Constitution

NBFCs were established under the Companies Act 1956 whereas banks were registered under the Banking Regulation Act, 1949. Hence both follow different rules and regulations whilst providing services.

• Demand Deposit

NBFCs don’t accept DD for any financial transaction. Demand deposit is a fund from which a person can withdraw deposit at any time. However, in banks these accounts are used for making payments.

• Reserve Ratio

NBFCs are not required to maintain a reserve ratio but for banks it is mandatory to maintain reserve ratio as it affects the money supply. The reserve ratio is depositor’s balance that should be held banks established by the Central bank.

• FDI

In case of NBFCs up to 100% foreign investments is accepted whereas in case of banks it is up to 74%.

• Payment and Settlement System

NBFCs are not part of the Payment and Settlement System but banks are considered the core of the system.

• Deposit insurance facility

This is readily available to banks’ customers. It is offered by the Deposit Insurance and Credit Guarantee Corporation. It is not available for NBFCs.

• Self Drawn Cheques

NBFCs’ can’t issue self drawn cheques but banks can.

NBFC vs Bank: Which is better for Loans?

Most borrowers prefer to take loans from NBFCs, considering the ease of getting a loan. Borrowers are discouraged from applying for loans from the bank due to the stringent regulations and cumbersome paperwork. Moreover, since the need for finance has been continuously increasing, banks alone cannot cater to the requirements of all individuals and groups. That’s why NBFCs play a crucial role in providing finance, both in public as well as the private sector. There are large numbers of NBFC RBI registration in the past decade.

In an era where banks are suffering badly on account of bad loans and poor profitability, NBFCs have risen as a star in the field of finance lending to segments like gold, housing, infrastructure, and retail.

NBFC registration in India is easier than a bank license. NBFCs have been established to grant credit to an under-served section of society, which has not come under the purview of banks or have been denied credit by the banks on account of their credit rating score. At a time when banks are busy in fulfilling the financial needs of the larger businesses, NBFCs have concentrated on small borrowers as their foremost customers.

NBFCs process the loans much faster than banks as the paperwork, eligibility, and requirements are less stringent compared to a bank. This makes the money available to the borrowers in a few days.

The most important aspect to consider while applying for a loan is the interest rate. NBFCs have come a long way in keeping their interest rate on lending on par with the banking segment. Therefore, along with other benefits, the lower interest rate attracts a lot more customers.

Banks always place a strain on the credit rating score of the borrower; in the absence of which, many are denied finances. The ease of getting finances in a less complication manner makes NBFCs the first preference for most borrowers, even though their interest rate is a little higher. Most of the times borrowers are ready to compromise on the interest rates if the loan amount is large enough and they get approval quickly.

The government also provides the necessary support for the proper functioning of NBFCs in the financial sector. The aggregated balance sheet of the NBFC sector showed an average growth of 15.5% on a year-on-year basis in March 2016. Loans and advances in NBFCs are also showing an average yearly growth, reaching the mark of around 16 %.

Due to liberal government policy, the need for NBFC License has been increased and also fintech founders prefer a takeover of NBFC and starting an online lending business.

In many cases, such as gold loans, NBFCs gives leverage to the borrowers to repay their regular interests throughout the tenure of the loan and pay the principal at the end. However, gold loans are term loans for banks, which mean both the principal and interests are to be paid regularly. Prepayments of loans are also easier since NBFC have no penalty clause as there is with banks.

Another advantage to being considered while applying for loans from NBFCs is that while computing a loan amount over a property, it takes into account the calculation of statutory charges, for example, stamp duty, and enlistment. This means that you are qualified for a higher loan amount. The same is not true for loans from banks.

Conclusion

On the whole, it can be summarized that NBFCs are a more comprehensive and hassle-free option to avail a loan. The time limit for the sanction is also less in case of NBFC vs. bank. Normally it takes 3 to 5 working days for a loan disbursal through an NBFC versus 12-15 days in the case of banks.

Many residential projects are also utilizing NBFCs, providing an opportunity to individuals with a low credit score to take the benefits of a home loan and fulfil their aim of owning a house.

Do you wish to apply for NBFC Registration in India? Or are you looking for an NBFC takeover advisory? Would you like to know about the NBFC / Fintech consulting or know more about peer to peer lending? Please feel free to contact Enterslice, India’s leading online legal and tax advisory firm.

Read our article:Applicability and Effects of GST on NBFCs in India