Loans have become essential to our lives. Whether we use it for business, buy some expensive products or property, or even for further wealth creation. Very few people can withstand unpredictable stages in life without worrying about a loan. Those businesses die or wither away who are unable to access capital, as and when required. Today markets are opening up and the government has also supported SMEs with its various schemes. There are many options available if you need a loan. To choose between a bank or NBFC finance option, you should consider these and make an informed decision.
If someone is looking to get a quick loan, then the first option has been to approach an NBFC. As banks are stricter in approving loans. The advantages of NBFCs over banks are many and both of them have their own set of disadvantages too.
It is, finally, up to the borrower to choose the best option.
Because of the popularity of NBFC over Banks, in accessing finance. And the fact that the NBFC sector is set to expand further in the coming days. Many companies are applying for NBFC License nowadays.
Comparison of Table
Banks can manage financial products and services generally authorized to them. Most importantly banks can accept demand deposits while NBFCs can only lend or invest. They are not allowed to accept demand deposits. A demand deposit is an account that allows the account holder to withdraw money from this account as per need.
Here is a quick comparison table listing out the difference between NBFC and Bank Finance. Especially when it comes to assessing which lender you should resort to for your loan.
|Interest Rates||The rate of Interest will be comparatively higher||Lower|
|Eligibility Criteria||Checks are faster & easier||Stringent|
|Time||Faster Sanctions||Not so fast for general people. For reputed ones, the process faster|
|Flexibility||The course type and conditions have a wider variety||Products have rigid conditions|
|Coverage||The entire amount required for a certain project may be approved and disbursed||A certain part of the project is financed only|
|Processing Fees||Generally higher, 1-3%||Lower, from 0.5-2%|
How NBFC Finance Differs to Bank Finance
People are opting to take finance from NBFC over a bank due to the many advantages on offer. Though all NBFCs are not entitled to accept demand deposits, they can make investments and give loans.
With stringent rules and regulations on the paperwork, affidavits, income proofs, etc. demanded by the banks, borrowers prefer NBFCs over banks, even though they may be charging a higher rate of interest.
Besides, the time taken for approving or sanctioning a loan by banks is higher than NBFCs generally, making them the preferred choice.
Below we mention the main reasons why NBFC finance is more popular than loans from banks:
The main factor in choosing a lender is the rate of interest. NBFCs have brought down interest rates by aggressively marketing their competitive products. With lower interest rates, loans from NBFCs are more beneficial, easy, and affordable. The interest rates on bank finance are floating, based on MCLR (Marginal Cost-based Lending Rate). These are determined using RBI’s mandated lending rates. Which, in turn, depends upon macroeconomic factors. While the interest in NBFC finance is set according to RPLR (Retail Prime Lending Rate). Mostly, bank rates are often lower than NBFC, though now NBFCs are coming up with competitive rates of interest, to attract more borrowers.
However, the interest rates are reset by banks on existing loans when the reset date arrives. This date can be 6-months, 1-year or more (usually it is done annually). Such changes are passed on to borrowers faster than NBFCs because the interest rates are linked to MCLR whereas NBFC’s rates are linked to RPLR.
Loan approval is easier in the case of NBFCs as their eligibility criteria are much less stringent as compared with banks. Fast and hassle-free service from NBFC makes them the best option when someone needs quick money. A borrower may be willing to pay a higher interest rate if there is an urgent requirement of a loan.
Less Stringent Rules
The process is much easier in NBFC of getting finance than from banks. With their less stringent rules and regulations, more borrowers are satisfied. The documentation and paperwork are much less while banks can be stringent when it comes to the approval of the documents. If someone is unable to provide requisite documents, banks would never process the loan and refuse the application. However, NBFCs need minimum documentation, and loans from them are processed much faster than a bank.
NBFCs can sanction an amount higher than banks. Also, most banks don’t fund the complete credit requirement, as a practice. They fund only in part and the rest has to be paid by the borrower. However, NBFCs strive to help borrowers and find out ways to sanction the entire loan amount. While some loans have a pre-approved loan limit, which means if you, as a business owner, can withdraw funds from your pre-approved loan limit. Another advantage of such finance is that the business will be paying interest only on the used amount and not on the entire loan amount. This helps in reducing the monthly business loan EMIs. Such a pre-approved loan rescues the business-owners from the risk of shortages of capital. It also avoids the need to apply for multiple applications for procuring loan at any point in time.
Banks would easily reject applications from individuals with a poor credit score. They follow strict guidelines and a poor credit score is deemed risky. But these individuals can approach NBFC, as it has loan offers that may be provided to people with low credit scores. But mostly the interest rate, charged in such situations, is higher, to balance out the default risk. NBFCs may offer loans even if the credit score is not too good.
Pre-Payment, Foreclosure, and Late Payments
All loans have some associated charges attached. Both banks and NBFCs charge for pre-payment and foreclosure but charges by NBFCs tend to be higher. Also, their late payment charges can be close to 15-20% of your monthly EMI. The processing fees are, generally, also higher by NBFC vs bank, although some banks may charge similarly. Whichever lender you choose, make sure to calculate future interests, and consider associated additional costs with repayment.
With changing times, demanding a change in the outlook of loan offers. NBFCs, with their proactive and aggressive marketing, offer flexibility. For instance, Flexi term loans and Flexi interest-only loans.
In Flexi term loans, the principal and the interest constitute the EMIs. While in Flexi interest-only loans, the EMIs consist only of the interest component and there is an option of paying the principal at the end of tenure. This further brings down the EMI amount.
Suppose a loan has been availed of Rs. 50 lakh for a tenure of 20 years, at an annual interest of 8.6%. The total amount of interest paid comes to be around Rs. 55 lakh over the complete home loan tenure. Far more than the principal amount. Overdraft facility helps to reduce interest through pre-payments. A loan with the overdraft facility is linked to the borrower’s bank account and surplus funds can be deposited in that account. These payments over and above the EMI are treated as pre-payments towards the loan. This brings down the overall loan liability and saves on interest payments. Banks are entitled to offer the overdraft facility to their borrowers but not NBFCs.
The main function of both banks and NBFCs is to meet loan requests. The entire financial industry is prominently into services. However, when it comes to dedicated customer service, most of the time, NBFCs outpace banks. With every loan approval, you are allowed to keep a tab of all your loan details, statuses, payments, and charges on its online platform. Moreover, you are assigned a relationship manager (RM) who attends to all your queries and helps you manage your loan easily.
Both these lenders have their pros and cons. You should carefully read the offer documents, calculate EMIs, and consider the factors mentioned above before approaching either of the two for a loan.
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Frequently Asked Questions
Q. What is NBFC?
NBFC is a company registered under the Companies Act 1956 or 2013. NBFC is a company with its primary business of receiving deposits. It raises funds from the public (directly or indirectly) and lends them to the small enterprises. NBFCs provide credit facilities and are preferred more than banks. They are not allowed to run their business without getting a license from RBI.
NBFCs are an important source of financing for the Indian small scale industries.
Q. What is the process of NBFC registration?
- The applicant company is required to apply online for NBFC registration to the RBI. On successful submission of the application form and relevant documents, a CARN number is generated. This number is to be used for reference during all future conversations and inquiries.
- After that, the company is to submit the hard copies of the online application, and the supporting documents uploaded, to the nearest regional office of the RBI.
- After verifying the documents, the regional office forwards the application to the head office of the RBI. There, a more thorough examination is conducted.
- If all legal conditions are being met, the company will be registered as an NBFC. And the NBFC license will be issued.
Q. What documents are required for NBFC registration?
The documents to be attached with the application form for NBFC registration are:
- Company’s Incorporation Certificate
- Company’s Bank Account with a minimum paid-up equity share capital of Rs. 2 crore
- MoA & AoA
- Address proof of the company
- Duly filled up and signed Annexure I, II, and III
- Details about the Directors
- Documents of administration and management of the company
- Audited financial accounts for the last 3-years
- Board resolution approving the company’s registration as an NBFC
- A brief overview of the company’s works and activities in the past 3 years
- Income tax, PAN, etc.
- Any other relevant documents.
Q. Does RBI regulates all financial institutions?
No, RBI does not regulate all financial institutions. Housing Finance Companies, Merchant Banking Companies, Stock Exchanges, Companies engaged in the business of stock-broking/sub-broking, Venture Capital Fund Companies, Insurance companies, Nidhi Companies, and Chit Fund Companies are NBFCs but they are exempt from registration u/s 45-IA of the RBI Act, 1934.
Q. What are the responsibilities of the NBFCs registered with RBI, about submitting returns and other information?
- Returns to be submitted by NBFC-D
- NBS-1Quarterly Returns on deposits in First Schedule.
- NBS-2Quarterly Returns on Prudential Norms are required to be submitted by NBFC accepting public deposits.
- NBS-3Quarterly Returns on Liquid Assets by the deposit accepting NBFC.
- NBS-4Annual Returns of critical parameters by a company whose CoR was rejected, holding public deposits.
- NBS-6Monthly Returns on exposure to capital market by NBFC-D with total assets of Rs. 100 crore or over.
- ALM Half-yearly Returns by NBFC holding public deposits of over Rs. 20 crore or asset size of more than Rs. 100 crore
- Audited Balance sheet and Auditor’s Report by NBFC accepting public deposits.
- Branch Info Return.
- Returns to be submitted by NBFCs-ND-SI
- NBS-7Quarterly statement of capital funds, risk-weighted assets, risk asset ratio etc., for NBFC-ND-SI.
- Important Financial Parameters Monthly Returns by NBFCs-ND-SI.
- ALM Returns:
(i) NBS-ALM-1: Monthly Statement of short term dynamic liquidity.
(ii) NBS-ALM-2: Half-yearly Statement of structural liquidity,
(iii) NBS-ALM-3: Half-yearly Statement of Interest Rate Sensitivity.
- Branch Info return.
- Returns by NBFC-ND having assets of more than Rs. 50 crore but less than Rs. 100 crore
Basic information like name of the company, address, NOF, profit /loss during the last 3-years to be submitted quarterly.