Banks are a type of financial institutions which make loans as well as accept deposits from the public. Mainly two types of banks can be seen in an economy- Central bank and commercial banks. On the other hand, an NBFC or a non-banking financial institution is a type of financial institution which does not accept any deposits from the public. It is a form of a company registered under the companies act, 2013. They assist in the bank-related functions but do not exactly function like a bank. It is often difficult to choose between Banks and NBFCs when it comes to applying for loans. Although these institutions provide similar services in the financial sector, there are fundamental differences in their identities, constitution, and functioning.
Banks and NBFCs provide personal services like providing loans. Indian banks are incorporated under the Banking Companies Act, while the formation of NBFCs is governed by the Companies Act 1956. This reason prohibits NBFCs from offering banking services such as accepting demand deposits, issuing of cheques and bank drafts, etc. It also keeps NBFCs outside the jurisdiction of Reserve Bank of India in matters such as repayment of deposits, payments and settlement systems, etc.
When it comes to availing loans, including the likes of durable consumer loans, vehicle finance loans, home loans, etc., the banks are preferred by the corporate sector, while the retail segment favors NBFCs. The major difference lies in the field of loan application processing regarding requirements, paperwork, and eligibility. Here, the banks follow more rigorous procedures. One positive side of this strictness is the eventual access to lower processing fees and interest rates. Banks also offer discounts to women customer, unlike most of the NBFCs. However, the loan processing time of the latter is much faster, making approval and disbursement of the same quicker. Unlike banks that seek high credit scores, NBFCs are open to lower scores but charge higher interest rates.
While deciding whether to choose banks or NBFCs for taking loans, one has the tendency for selecting the cheapest option, having the lowest interest rates and processing fees. Because of the privileges vested in the banks, they have the luxury of providing lower processing fees, which can be further lowered depending upon the prevailing economic conditions and relations with the concerned bank. The size of the loan is also a major consideration. NBFCs sometimes cover stamp duties and registration fees for a property worth less than Rs. 10 lakh. At certain occasions, they even offer higher loan to value ratio, a highly lucrative offer for the customers.
A loan allowing easier access to a larger amount of money often makes the purchase of properties possible. This is because it takes care of the down payment amount required up front, which many are unable to raise.
In a nutshell, availing loans from banks have advantages such as lower interest rates for women customers, lower processing charges and interest rates on an average. NBFCs offer faster loan disbursal, which includes covered expenses for stamp duty and registration costs. The institutional procedures such as paperwork, eligibility checking, etc. are far less stringent for the NBFCs. All in all, it comes down to the question: What does the customer want? As per recent research and studies, it is observed that the NBFCs are outperforming the banks. The continued constant and better performance from NBFCs has highly increased the level of satisfaction of the customers by more than fifteen percent as compared to the banks, according to the recent “Financial Stability Report.”
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