A common dilemma faced by potential borrowers is where to shop for loans. Should they go to a bank, or approach a non-banking financial company? Both are financial entities that offer lucrative deals to customers with all kinds of borrowing needs.
There are several differences between the loans offered by banks and NBFCs. Understanding these will make the purchasing decision easier for consumers. Let’s take a look at these differences in detail:
Banks and NBFCs: Key Differences
While it is true that banks and NBFCs both offer financial services, banks are regulated by the Reserve Bank of India, while NBFCs are created under the Companies’ Act of 1956. NBFCs are not allowed to accept deposits or issue drafts or cheques. Banks, on the other hand, have the right to be a part of the payment and settlement system allowing account holders to send or receive money. Both banks and NBFCs can offer loans to consumers as per their discretion and terms and conditions.
Whom to approach for a loan?
While choosing between a bank and an NBFC, you should take into account the kind of loan you are seeking. Many NBFCs, for example, offer a host of consumer durable loans allowing for quick processing and easy repayment structure. Banks, on the other hand, may have a larger variety of loan products, such as home loans, car loans, education loans, personal loans etc. The following points could be key differentiators.
Interest Rates: Bank loans with floating rates are linked to the MCLR, which are linked to macroeconomic factors such as the RBI-mandated lending rates. NBFCs and housing finance corporations (HFCs) lend as per the Prime Lending Rate (PLR), which is not regulated by the RBI. This allows NBFCs and HFCs greater freedom to increase or decrease these rates as they see fit. This also suits customers who may sometimes benefit from special, low-interest loans (for example, zero interest car loans), or high-interest loans just in case they do not meet a bank’s loan eligibility criteria. This gives the NBFCs an edge over banks who cannot lend below the MCLR.
Credit Score Requirements: Both NBFCs and banks will offer their best interest rates to customers with high credit scores. For example, a leading bank recently offered its best interest rate of 8.35% on home loans to customers with a CIBIL score above 750. However, customers with a lower score (in the 550-700 range) may find loans from NBFCs to be less stringent in terms of eligibility requirements.
Loan Eligibility: NBFCs may have a more relaxed approached to your loan eligibility – the amount that you may be sanctioned as per your repayment capacity, credit score, etc. For example, banks will typically fund up to 80% of your home value and would exclude costs towards stamp duty and registration. NBFCs may devise ways to help customers include these extra costs in the loan. This is to the customer’s benefit as he may be able to take on a larger loan.
Stringent Paperwork: NBFCs have an impressive market share for retail loans. This they’ve been able to achieve through relaxed paperwork and processing requirements. Banks on the other hand are more thorough with paperwork. We’re in the age of high NPAs and banks have a responsibility to lend with great care.
When out shopping for a loan having a tunnel vision of opting for just bank loans or just NBFCs is best avoided. Both banks and NBFCs have their advantages and a final decision must be made keeping in mind the loan type, the interest rates, charges, credit score, and the loan disbursal timelines.
(The author is CEO, Bankbazaar.com)