In the world of finance, banks and NBFCs are key players. Banks are the more traditional institutions that take deposits from the public and lend money, while NBFCs offer various financial services without needing a banking license. Let's explore the main differences between NBFCs and banks.
Traditional Banks vs NBFCs: A Breakdown
| Feature | Banks | NBFCs |
| Regulation | RBI under Banking Regulations Act (1949) | RBI under Companies Act (1956) |
| Services | Wide range of banking activities | Lending & investment focus |
| Deposits | Accept demand & time deposits (savings, current, fixed deposits) | Limited deposit acceptance (mostly fixed deposits) |
| Checks | Issue & accept checks | Cannot issue or accept checks |
| License | Banking license required | No banking license needed |
| Credit Creation | Can create credit through fractional reserve banking | Lacks power to create credit |
| Clearing House | Members of the clearing house system | No clearing house membership |
| Deposit Guarantee | Deposits may be insured by government schemes | No government guarantee on deposits |
| RBI Facilities | Access to borrowing and payment systems | No access to these RBI facilities |
| Priority Sector Lending | Must allocate a portion of loans to specific sectors | Not bound by priority sector lending norms |
What are the factors that are helping NBFCs to grow in India?
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Better Lending Models
NBFCs use financial technology to offer better financial products to consumers. For example, peer-to-peer lending platforms connect the lenders to the borrowers for a small fee. In this type of model, the lenders get to earn interest on the money they lent, and the borrower gets to use that money for their needs.
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Automated Risk Assessment
With the help of technology, NBFCs have automated the underwriting process which increases the speed of the personal application process. This also lowers the operating costs, enabling NBFCs to offer competitive interest rates to their customers.
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Fast and Easy Loan Approval and Disbursal
NBFCs can approve a loan within a few minutes. Faster loan approval means quicker access to funds.
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Better Data Utilisation
NBFCs do not base their lending decision on only the borrower’s credit score. A lot of data points are considered when scrutinising the loan application.
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Strong Security System
NBFCs use advanced technology to ensure the customer’s sensitive information is safe and secure.
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Unique Offerings
NBFCs have diversified their loan offerings to meet the unique financial requirements of the consumers. Through debt consolidation loans, personal loans, wedding loans, consumer durable loans, home renovation loans, vehicle loans, two-wheeler loans, etc., there has been a healthy expansion in the lending markets.
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Loan Offered to More Borrowers
NBFCs have been able to meet the diverse financial demands of many bank-excluded customers. Their unique lending model has allowed people, including business owners, to get a loan, which was difficult with the traditional banks.
Types of NBFCs
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Asset Finance Company (AFC)
An AFC deals with financing physical assets that are vital for economic activities. These companies primarily focus on providing financial support for tangible assets essential for various economic endeavors, such as vehicles, machinery, and industrial equipment.
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Loan Company (LC)
A loan company mainly offers loans or advances for different purposes, excluding its own operations. Unlike AFCs, loan companies primarily engage in lending activities.
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Mortgage Guarantee Company (MGC)
An MGC specializes in providing mortgage guarantee services, with a significant portion of its business turnover or income derived from this activity. Additionally, an MGC is required to maintain a net-owned fund of Rs. 100 crore.
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Investment Company (IC)
An IC, categorised as a type of Non-Banking Financial Company (NBFC), primarily focuses on acquiring securities as its main business activity.
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Infrastructure Finance Company (IFC)
An IFC specialises in financing infrastructure projects and must meet specific criteria, including deploying a significant portion of its loans towards infrastructure projects, maintaining a minimum Net Owned Fund of Rs. 300 crore, possessing a minimum credit rating of 'A' or equivalent, and maintaining a Capital to Risk (Weighted) Assets Ratio (CRAR) of 15%.
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Non-operative Financial Holding Company (NOHFC)
A Non-operative Financial Holding Company (NOHFC) is a type of NBFC that allows promoters or promoter groups to establish a new bank. The NOHFC is fully owned and responsible for holding the bank and other financial service companies regulated by the RBI or other financial sector regulators, within regulatory limits.
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Infrastructure Debt Fund (IDF-NBFC)
An Infrastructure Debt Fund-NBFC (IDF-NBFC) is an NBFC registered to provide long-term debt to infrastructure projects. IDF-NBFCs issue bonds denominated in Rupees or Dollars with a minimum maturity of five years. These funds are sponsored exclusively by Infrastructure Finance Companies and play a vital role in financing infrastructure projects.
Why NBFCs are a better choice for personal loans?
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End-to-End Online Application Process
With just a few details, customers can complete the loan application process online.
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Instant Approval
Customers can receive loan approval within a few minutes after applying with an NBFC for a personal loan.
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Shorter Loan Processing Time
The traditional loan process takes anywhere between a few days to a few weeks. NBFCs can process a loan application within 24 hours after the approval. Thus, borrowers get to use the money for their urgent funding needs.
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Competitive Interest Rates
NBFCs’ base interest rate is based on the prime lending rate, which the RBI does not regulate. Hence, NBFCs enjoy greater flexibility and can offer competitive rates of interest to their customers.
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Lenient Eligibility Criteria
NBFCs have easy-to-meet eligibility criteria, which broadens their range of consumers. Borrowers can also qualify for a loan despite having a low credit score because NBFCs look at other aspects along with the borrower’s repayment capacity.
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Minimum Documentation
NBFCs require minimum documents to process the loan, unlike banks where customers are bogged down with exhaustive paperwork.
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Exceptional Customer Service
NBFCs offer superior customer service to provide an excellent customer experience at every step of the customer journey – from loan approval to loan disbursal.
Frequently Asked Questions (FAQs)
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How Are NBFCs Different from Banks?
NBFCs differ from banks because they don't accept demand deposits and can invest up to 100% in foreign ventures.
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What Products or Services Do NBFCs Offer?
NBFCs provide various financial services, including gold loans, personal loans, education loans, housing loans, vehicle loans, and consumer durable loans. They also offer services like hire-purchase and leasing, IPO funding, venture capital, and investment in non-convertible debentures.
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Are NBFC Loans Safe?
NBFC loans are financial products provided by RBI-licensed and regulated finance companies. While NBFCs offer services similar to banks, they operate without a banking license.
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Do NBFCs Report to CIBIL?
Credit reporting to institutions such as CIBIL typically involves active and operational financial entities, including NBFCs, banks, and other lending organisations with active customer accounts engaged in lending activities.
