Banks and NBFCs both provide a large variety of loans ranging from education loans, business loans car loans, home loans, personal loans, and so on. Banks operate under the regulations of Reserve Bank of India and hence have stricter principles for sanctioning loans. Moreover, all the Indian banks are formed under Banking Companies Act to provide other services such as accepting deposits, and issuing cheques. Whereas, NBFCs are formed under the Companies Act and offer all the services that companies offer.
NBFCs have a quicker and faster loan disbursal process as compared to banks. Moreover, research has shown that NBFCs have outclassed the banks in delivering better performance with a 15% increase in the customer satisfaction. Recent reports have also shown that NBFCs have a better financial stability than most banks. Banks also have a set of categories for the businesses, and if a business doesn’t fall into any of those categories – it won’t be sanctioned a loan. Whereas, NBFCs provide loans even if a business has a low credit history.
Essential Things to Consider While Selecting a Lending Institution
● Interest rates are an important point to consider and both banks and NBFCs operate on different benchmarks. There are two base rates – Marginal Cost of Lending Rate (MCLR) and Prime Lending Rate (PLR). Banks operate according to MCLR, while NBFCs carry out their interest charges based on PLR.
● The interest rates of MCLR linked loans change after a stipulated period which is mentioned in the loan documents with clear interval dates. When there is a falling trend in interest rates, customers have the advantage of receiving rate cuts mandated by RBI. However, since NBFCs work on PLR, there is no link to RBI. Banks have a regulation that they are not allowed to decrease the lending rates below MCLR. Whereas, NBFCs have no such instructions and they can set the interest rates according to them, whether by increasing or decreasing them.
● NBFCs offer many other benefits with the loans like charging no processing fee, no part payment or prepayment charges. Some of them also have particular loans especially for women which have a flexibility in paying the instalments.
● NBFCs in India have recently took a huge leap in terms of financial stability and assets under management. Among many of such institutions, Nbfcs has claimed to cross $2.95 billion mark by the year 2014. Whereas, the banks have lost their lending shares in the market while NBFCs have indicated a growth of almost 28% compared to 2017. To be more precisely, the three years from 2014 to 2017 have shown that NBFCs share in the total loans sanctioned, grew to 44% from 21%. Whereas, the same has fallen to 28% from 49% for the banking sector.
● When it comes to small business loans, banks usually don’t extend credit facilities to SMEs. Also, earlier banks with strong balance sheets were able to provide better loans to the customers. However, now the NBFCs have a much better quality of capital, an innovative approach to technology usage. All this has helped them to enter into SME and MSME sector which has helped in bridging the gap of unmet loans to such customers.
NBFCs offer quick and easy business loans to small business owners with an easy documentation and disbursal process. The interest rates charged on these loans start from 18% and the amount which can be availed can go up to 30 Lakhs. Moreover, if you apply online, you get pre-approved offers which provide instant loans on no collateral. There are different categories offered under business loans, which include loans for working capital, machinery and special loans for women entrepreneurs.
