Opt For Business Loan from NBFCs over Banks - Business Loan Blog - Tata Capital

Why Businesses Prefer NBFCs Over Banks for Business Loans?

Mar 06, 2017

Finance helps entrepreneurs fulfill their goals by providing the necessary funds. It is imperative to have adequate finance so as to ensure smooth functioning of business activities. There are two means through which firms may obtain finance to fund their daily operations; either through banks or through Non-Banking Financial Companies (NBFCs).

Banks vs. NBFCs

While banks in India are incorporated under the Banking Regulation Act, 1949, NBFCs are governed by Companies Act, 1956. Although NBFCs are similar to banks, they do not perform all the financial activities conducted by banks, such as accepting demand draft and issuing cheques. However, NBFCs provide loans and advances, offer credit facility, and manage the portfolio of stocks.

Traditionally, banks were given more importance as compared to NBFCs. Even though such NBFCs have been in existence for quite a long time, their popularity grew only recently. Many businesses are now opting to borrow a loan from NBFCs, due to the numerous advantages such institutions have to offer.

Following are three reasons why firms avail of a business loan from NBFCs.

1. Quicker processing

It is a well-known fact that banks are stringent about applicants fulfilling the required eligibility criteria. In case the applicant fails to meet the bank's eligibility criteria, the application is denied. However, NBFCs have a less stringent set of requirements. Besides, most NBFCs require minimal documentation. Upon successful submission of all the documents, the loan is processed quickly and disbursed in the promoter's account. Such a feature is highly beneficial for those seeking to obtain funds on an urgent basis.

2. Competitive interest rates

One of the main aspects of a loan is its interest rate. A lower rate of interest indicates a lower cost of servicing the loan. This results in lower Equated Monthly Installment (EMI) amount to be paid. NBFCs generally charge a competitive interest rate based on the business turnover. The applicant's credibility also plays a major role in determining the interest rate.

3. Availability of loans for those with poor credit history

Banks generally do not provide loans to those with bad credit. This is because banks consider those with low credit as high-risk individuals who may default on their EMI payments. NBFCs, on the other hand, offer loans for business purposes to those with a lower credit score. However, it is important to remember that the interest rate in such cases is high. NBFCs levy a higher interest rate to offset the risk of default.

Due to the aforementioned advantages, NBFCs are growing exponentially. As finance is the basic requirement of any business, banks alone are not able to cater to such a wide customer base. Therefore, NBFCs came into existence, both in private and public sector, to complement banks in offering loans to businesses.

As per the latest report from the Reserve Bank of India (RBI), NBFC's are performing better than banks, with their balance sheet expanding by 15.5%. Besides, the profitability of a few banks is also declining. Due to such a situation, the NBFC sector has witnessed a growth. With numerous financial services and product offerings like housing loans, gold loans, and business loans besides others, this sector is set to expand even further.