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Personal loans are easily available nowadays, with multiple options to choose from. Apart from the traditional bank approach, applicants can also choose to go with Non-Banking Financial Companies or NBFCs. These financial institutions do not need a banking license but are regulated by the Reserve Bank of India just as a bank.Off-late NBFCs have become a preferred option for loan applicants giving a fierce competition to their bank counterparts. Let’s understand how are they different from a bank and which one is best for availing a personal loan.
Differences between NBFCs and Banks
While both banks and NBFCs offer similar services to their customers, they differ in some key areas. 3 crucial points of differences are mentioned below.
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| NBFC | Bank |
| Banking Services | Being a non-banking entity, it is not allowed to render some banking-related services such as acceptance or issuance of demand-drafts and cheques | Along with offering credit services, it also offers banking services to its customers. |
| Regulation | An NBFC is incorporated under the Companies Act, 1956, and they don't need to be regulated by the RBI. However, large NBFCs that accept public deposits are governed and supervised by the RBI rules. | A bank is registered under the Reserve Bank of Inda (RBI) and is regulated directly by the same. |
| Reserve Ratio | Since an NBFC is not registered under the RBI, it does not have to maintain a specified reserve ratio such as CRR (Cash Reserve Ratio). Since NBFCs don't have to offer many banking services such as the issuance of cheques or demand-drafts, CRR is not an important factor. However, NBFCs regulated by the RBI have to maintain a stringent CRR. | All banks have to maintain a specified CRR ratio that ensures their liquidity for the deposits they hold. |
How NBFCs have the edge over Banks?
With lenient loans and fluid policies, NBFCs have become a popular choice among borrowers. Instant amount transfer and comfortable application procedures add a cherry to the top. But, banks are still offering competition to emerging NBFCs with their firm and regulated plans and policies.
- Eligibility and Processing: Banks are very particular about the fulfilment of the borrower eligibility criteria. Loan requests are mostly placed when people need immediate capital. Banks with their stringent loan policies and rigid terms and conditions take time to process loan requests due to repeated background and account creditworthiness checks.NBFCs, on the other hand, facilitate quick money transfer with minimum documentation and hassle. Lenient eligibility requirements lead to a smooth and easy loan granting procedure. Borrowers also don’t hesitate to pay slightly higher interest rates with NBFCs to avoid repeated checks and make an instant transaction.
- Fluid Rules and Regulations: Under the Companies Act, the rules and regulations with NBFCs are somewhat lenient in comparison to the strict bank policies governed directly by the RBI. Though there is a slight chance of default, NBFCs have managed to fair out effectively well in the past few years. They are perfect examples of systematic money transfer and management without rigid and unmoving rules.
- Inferior Credit Ratings won’t stop Borrowers: Poor or inferior credit ratings might result in the rejection of loan applications by banks. Banks, under the regulation of the RBI, don’t sanction loan applications if the applicant’s credit rating is below 600 as they fear that the individual is a high-risk candidate. However, this is not the case with NBFCs. You can apply for personal loans with NBFCs even with a low credit score and get success.
Choosing the Right Lender
NBFCs and banks both offer business, personal and retail loans. While banks are known for their low-interest rates, NBFCs are fast catching up by offering competitive interest rates to the customers. Non-banking financial companies are becoming a preferred option due to their less stringent regulations and terms and conditions. If you’re looking for quick and hassle-free funds, NBFCs can be your go-to option.
DISCLAIMER
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
