Nbfc Vs Bank: Which One to Choose for Your Personal Loan?

Home

Services

Products

Help

Get App

NBFC Vs Bank: Which is Better for Your Personal Loan?

When you need a Personal Loan, deciding between a Non-Banking Financial Company (NBFC) and a traditional bank can be a very important decision. Each has its benefits. NBFCs are great for fast processing and flexibility, which helps if your credit score isn't perfect. Banks might take longer but usually offer lower interest rates and are seen as very safe. This blog will explore the main differences between NBFCs and banks. It will help you figure out which one might be better for getting a Personal Loan that fits what you need.

What is an NBFC?

An NBFC, or Non-Banking Financial Company, is a special type of company in India. It's registered under a law called the Companies Act of 1956. What does an NBFC do? Well, it gives out loans and can also deal with things like shares, stocks, and bonds. It can help people buy things on hire-purchase, which means you can pay in parts over time. They also deal with insurance and even run chit-funds, which are like savings schemes where a group of people put in money and take turns taking the amount collected.

However, there are some things NBFCs don't do. They don't deal with farming or industrial activities, and they don't handle the buying, selling, or building of houses or other properties. Essentially, they fill in the gaps in financial services that traditional banks might not cover, especially for people or businesses that might not meet strict banking criteria.

What is a Bank?

A bank is a place where you can keep your money safely. It's not just a safe place; a bank also lends money and offers other financial services like managing wealth, exchanging foreign currency, and keeping valuable items in safe deposit boxes.

Banks are licensed to operate by the government, which means they must follow strict rules. This is great because it makes sure banks work in a way that keeps our money safe. Banks play a big role in how money moves around in the country. They help businesses grow by lending them money, and they help people buy homes or cars by giving them loans. They are responsible for making sure there's enough money available in the economy for various needs, helping everything run smoothly.

Key Differences Between NBFCs and Banks

Being aware of the differences between NBFCs and banks can help consumers and businesses make better financial decisions. While both entities provide financial services, their operations, regulatory frameworks, and service delivery mechanisms differ by a large extent, which impacts how they serve their customers. Let's take a look at the main differences through this table:

Aspect	NBFC	Bank
Regulation	Regulated by the Reserve Bank of India (RBI) but with fewer restrictions compared to banks.	Heavily regulated by the RBI and must meet strict criteria on capital adequacy and statutory liquidity.
Deposit Acceptance	Cannot accept demand deposits like savings accounts.	Can accept demand deposits and offer checking and savings account services.
Credit Creation	Do not have credit creation power.	Have the power to create credit within the economy.
Foreign Exchange Services	Limited to certain NBFCs with specific approval.	Generally allowed to deal in foreign exchange.
Maintenance of Reserve Ratios	Not required to maintain SLR (Statutory Liquidity Ratio) or CRR (Cash Reserve Ratio).	Mandatory to maintain CRR and SLR as per RBI guidelines.
Loan Securitization	Often engage in securitisation of loans (selling loans as securities).	Less frequently involved in securitisation compared to NBFCs.
Customer Focus	Usually focus on customer segments or markets underserved by traditional banks, such as small businesses or individuals with non-traditional credit profiles.	Serve a broader customer base, including individuals, large corporations, and other financial entities.
Interest Rates	Often have higher interest rates due to less strict regulatory requirements and higher risk profiles.	Usually offer lower interest rates due to their ability to raise cheaper funds and a more regulated environment.
Innovation and Flexibility	Generally more flexible and quicker to innovate in terms of loan products due to fewer regulatory constraints.	Innovation can be slower due to larger size, complexity, and regulatory compliance requirements.

Advantages of Choosing a NBFCs Vs Bank for Personal Loans

When considering where to secure a Personal Loan, it's important to weigh the benefits of NBFCs against traditional banks. Each has unique advantages that can be more or less beneficial depending on a borrower’s specific needs, such as credit history, speed of service, and flexibility in loan terms, such as;

Feature	NBFC	Bank
Approval Speed	Generally faster as they face fewer regulatory hurdles.	Can be slower due to more strict compliance and checks.
Loan Approval for Low CIBIL Score	More likely to approve loans for those with lower CIBIL scores.	Usually require a higher CIBIL score for loan approval.
Customised Services	Often offer more flexible and customised loan products.	Standardised products with less flexibility.
Documentation	May require fewer documents for loan processing.	Often requires a comprehensive set of documents.

Features Of Personal Loans from NBFCs vs Banks

The features of Personal Loans can vary to a large extent between NBFCs and banks. This includes differences in interest rates, loan disbursement speeds, loan amounts, and terms. Being thorough about these can help you decide the best institution for your loan needs based on factors like how quickly you need the funds and your financial health.

Feature	NBFC	Bank
Interest Rates	May offer competitive rates, sometimes higher due to increased risk.	Generally offer lower interest rates.
Loan Disbursement Speed	Faster disbursement due to less strict procedures.	Disbursement speed may vary, and generally takes longer.
Loan Amount	Flexible loan amounts, often catering to larger or unconventional loans.	Typically offer standardized loan limits based on financial criteria.
Tenure	Flexible loan tenure, which can be negotiated based on the borrower's need.	Fixed tenure options generally aligned with the bank's policy.

Frequently Asked Questions - Refinancing Personal Loan

Q1: What are different types of NBFCs?

There are a few types of NBFCs. Asset Finance Companies help with funding for vehicles or machines. Investment Companies invest in stocks. Loan Companies give personal or business loans. Each type helps with different money needs.

Q2: Is it better to take a loan from a bank or an NBFC?

It depends on what you need. If you need a loan quickly or have a low credit score, NBFCs might help you faster. Banks are good if you want lower interest rates.

Q3: What products or services do NBFCs offer?

NBFCs offer loans, help you buy stocks, and can also offer insurance. They provide these services to people and businesses, especially where banks might not reach.

Q4: Are NBFCs able to conduct foreign exchange?

Yes, some NBFCs can handle foreign exchange if they get special permission from the RBI. They can do this, but not all NBFCs have this permission.