There was a time when banking was a complicated process. But with the digitisation of the system, it has become simple. Bank work, however, still requires a lot of paperwork, manual effort, and of course, much of your valuable time.
Non-Banking Financial Companies (NBFCs) are a compelling alternative to the institution of banking, and there are many reasons for the same. Let’s first understand the difference between banking and non-banking institutions.
Features of NBFC: Personal Loans, Asset Finance & More
NBFCs provide most of the wide array of services that banks do, making them both viable alternatives to one another.
Of these, the only services not provided by NBFCs are issuance/settlement of cheques, transactional services, and demand deposit acceptance.
Different types of NBFCs cater to service requirements; the primary ones are:
- Asset finance companies: for extending loans and advances for procuring assets (vehicle, home, etc.)
- Loan companies: for any loan other than for assets (personal loans, educational loans, etc.)
- Investment companies: for deals with the securities market
- Infrastructure finance companies: for extending loans for infrastructural projects
- Micro-finance institutions: for rural customers with stringent monetary specifications such as income requirements, loan amounts, etc.
Other NBFCs in India include:
- Mortgage guarantee companies
- Chit funds
- Core investment companies
- Others are in line with the categorization provided by the Reserve Bank of India
Difference between Banks and NBFCs
The key difference between banks and NBFCs is that banks generally require more formalities to process customer requirements. Banks are governed by banking licences, while NBFCs are not part of this system.
Both institutions were created for similar purposes but with vastly different approaches.
Let’s look at some other differences between the two:
|S No||Banks||Non-Banking Financial Companies|
|1.||A bank’s essential purpose is to extend loans and accept deposits. Moreover, deposits are guaranteed to customers by the central bank.||It is possible to take loans, including personal loans from non-banking financial companies, but only a small percentage (about 2%) of NBFCs accept deposits. These deposits are also not guaranteed by the central bank.|
|2.||Banks provide the facility to make transactions (via cheque, digitally, fund transfers, debit/credit cards, etc.)||Customers cannot make transactions via NBFC accounts.|
|3.||Loans above Rs 7.5 lakh require an applicant, guarantor & collateral.||Personal loans from NBFCs, among other kinds of loans, do not require collateral.|
|4.||Banks have myriad functions, purposes and features that are common to all. The specifics vary from bank to bank, but the same processes are available in all banks.||Non-banking financial companies provide very few services in comparison with banks. Each NBFC specialises in a specific set of functions tuned to the needs of a specific customer base.|
|5.||There are more formalities in place when availing of personal loans from banks (low credit scores can bar you from availing of a loan); thus, it also takes longer to process the loan.||NBFCs offer simpler services with fewer formalities to avail of loans. This includes instant credit and more flexible screening. Thus, a personal loan from NBFCs is easier to avail of than a bank.|
|6.||Banks generally have concrete interest rates that can be considered more pocket friendly as well.||NBFC interest rates are not common and differ on a case-by-case basis, considering applicant profiles, repayment ability, and so on.|
Why Choose NBFCs over Banks for Loans?
Listed above are the features of NBFCs that differentiate them and their workings from banks.
Non-banking facilities are an important addition to the financial system because they cater to a wider range of people.
The idea is to make credit more accessible to those that do not have collateral or great credit scores. Accessibility is the primary reason you should choose to take a personal loan from NBFCs instead of banks.
However, the NBFC loan interest rates can pose a problem to many customers. Because no collateral is required, the interest charged by non-banking institutions is generally higher than that of banks.
Where banks are usually capped at 12.5%, NBFC personal loan interest rates can shoot up to a much higher amount. This is to compensate for the ease with which these loans are made accessible, alongside the rapidness of the entire procedure.
Non-banking financial companies aim to make credit more widely and more easily available.
This works to your advantage because of the downsides of using a bank; Currently, who has the time to wait weeks when you can receive the same service within the next 24 hours!