NBFC vs Banks for Loans

Banks and NBFCs are both a fundamental part of the financial sector in our country. As both institutions access public funds in one way or another, it thus requires stringent rules to ensure that the activities of both Banks and NBFCs are not detrimental to the public interest. Therefore, both the institutions are governed by RBI to ensure appropriate control and supervision of their business activities.

The operational structure of banks and NBFCs are not similar. There are considerable differences between the two institutions. Such as where banks can accept demand deposits, NBFCs cannot; Banks form part of the payment and settlement system, and NBFCs do not; similarly, Banks can issue cheques drawn on itself and NBFCs cannot do such. 

Likewise, the loan system of both institutions also differs. This article focuses on the differences in loan systems by Banks and NBFCs.

What are the basic differences between Banks and NBFCs to be considered by the Borrowers? 

BASIS

BANKS

NBFCs

Registration and Supervision

Banks are registered under the Banking Regulation Act 1949 and are regulated and supervised by RBI.

NBFCs are registered under the Companies Act 2013 and those accepting deposits come under the supervision of RBI.

Services

The banks provide credit facilities along with other banking services to their customers.

NBFC cannot provide services related to banking such as issuance/acceptance of DD, cheques, deposit insurance facility, etc., being a Non-Banking Company.

FDI

Foreign investment in banks is permitted up to 74% of paid-up capital.

NBFCs are allowed to accept 100% foreign investment.

Application

Loan applications with banks are a time-consuming process.

NBFCs follow the swift loan application procedure.

Approval

Approval policies are tough in comparison to NBFCs.

NBFCs follow a speedy approval process in comparison to Banks.

Conditions

Terms and conditions are generally inflexible

Simple and customer-friendly terms and conditions are put in place.

Reserve Ratio

All banks must mandatorily maintain CRR (Cash Reserve Ratio) with RBI.

This rule is not applicable for NBFCs.

Interest rates

Banks are required to maintain their interest rates as per the RBI benchmark.

NBFCs set interest rates based on internal benchmarking.

Conclusion:

As per recent trends, businesses are becoming more inclined towards NBFCs to obtain a loan because of their easy processing and fewer terms and conditions. Even where interest rates are competitive, the terms and conditions attached with the lending schemes are generally easy and uncomplicated. The rate of client satisfaction in NBFCs is also increasing. These benefits allow businesses to become more constructive and manage their operational needs efficiently, without following rigid loan procedures.

 


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