NBFCs vs Banks: Here’s what you must know!

Banks have always been one of the most predominant financial institutions around the globe. Besides banks, there is also the Non-Banking Financial Company, or NBFC as commonly known, which performs credit and other financial activities. NBFCs are known to accomplish a wider range of financial activities than a bank. One of the main differences between the two is that a bank’s accountability lies with the RBI, but an NBFC is registered under the Companies Act, 1956.

NBFC

It is a legal entity that’s managed by the Reserve Bank of India under the RBI Act, 1934. Although they’re not banks, these bodies engage in lending and similar activities, like administering loans and advances, dealing within the market, providing credit facilities, managing savings and investing in commodities, and regulating stock portfolios.

NBFC is liable for actions like hire purchasing, leasing, infrastructure finance, venture capital finance, housing finance, etc. NBFC accepts deposits but is only restricted to term deposits, and deposits repayable on demand aren’t accepted by the company.

The Banks

Banks are financial organizations, authorized by the Government to manage several banking activities like accepting deposits, granting credit, managing withdrawals, and administering general utility services to the purchasers. Banks are the apex organization, which controls the entire financial system of the country. It acts as a financial advisor, between both parties, which assures the effortless functioning of the economy.

Banks are of various types like public sector banks, private sector banks, or foreign banks. All of them are in charge of loans, creating credit, mobilization of deposits, safe and time restrained transfer of cash and administering utility services.

As per the recent ‘Co-Lending Model’ (CLM), the Reserve Bank of India has allowed all registered NBFCs to explore tie-ups with scheduled commercial banks, so as to improve the flow of credit to the unserved and underserved sector of the economy. Typically, banks have lower rates, whereas NBFCs have better reach. The co-lending model aims to give the borrower the best of both worlds.

However, when it comes to personal loans, NBFCs are often considered to be the ideal choice and here’s why:

Fewer Rules and Regulations

As NBFC is under the Companies Act, the principles and regulations for lending aren’t as stringent as banks. This helps borrowers get loans easily and considering the simpler loan processing, borrowers are satisfied too.

Quick loan approval and disbursal

NBFCs ensure the processing is quicker and the necessary loan amount is disbursed within few hours, sometimes in minutes!

Minimum Documentation

NBFCs require minimum documents to process the loan, unlike banks where customers are caught up with exhaustive paperwork.

Competitive Interest Rates

Non-Banking Financial Sectors have begun to consider this area within the recent decades and have brought down the interest rates to either equally to bank lending rates or sometimes even lower to bank rates.

Ticket Size

Banks tend to give large ticket loans whereas the growth in small-ticket personal loans is primarily driven by NBFCs and fintech start-ups in the space.

Eligibility Criteria

NBFCs have relatively easy eligibility criteria, which widens their range of consumers. Borrowers can qualify for a loan despite having a low credit score because NBFCs consider other aspects alongside the borrower’s repayment capacity.

Automated risk assessment

With the assistance of technology, NBFCs have automated the underwriting process that increases the speed of the private application process. This also lowers the operating costs, enabling NBFCs to supply competitive interest rates to their customers.

To Sum Up

NBFCs are primarily formed to supply credit to the underserved section of the society, while the banks are authorized by the Government to get deposits and grant credit to the general public of the country. The licensing regulations of a bank are compulsory than that of an NBFC. Furthermore, a bank isn’t allowed to work any business except the banking business, while an NBFC can operate such a business.

It is very crucial to work out the differences between these institutions as it will help you make better choices based on your financial goals. With rapidly changing market trends, every penny counts, so picking the right institution is an important decision to make.