The demand for loans in India has surged in recent years, fueled by factors like growing property markets and rising aspirations. As of 2023, non-banking financial companies (NBFCs) in India reported total loans of around $455 billion [1]. In contrast, the total loans from banks in India amounted to approximately $1,828 billion in the same period [1]. This indicates that banks still hold a significantly larger share of the lending market compared to NBFCs. However, both sectors showed robust year-on-year growth, with loans from both banks and NBFCs growing at rates of 18% and 17%, respectively [1] (CEIC Data).

Understanding the Institutions:

Banks are the traditional financial institutions we know, accepting deposits and lending money. They are heavily regulated by the Reserve Bank of India (RBI), ensuring a high degree of safety and security. NBFCs (Non-Banking Financial Companies), on the other hand, offer similar loan products but function differently. They don’t accept public deposits and rely on market sources for funds, which can translate to higher interest rates for borrowers.

Key Differentiators: A Balancing Act

The choice between a Bank loan and an NBFC loan hinges on several crucial factors.

Advertisement

Today's Rate

Wed 11 Dec. 2024

Gold 24 KT 78,100/-

Gold 22 KT 72,600/-

Silver / Kg 94,300/-

Platinum 44,000/-

Recommended rate for Nagpur sarafa Making charges minimum 13% and above

1. Interest Rates: Banks typically offer lower interest rates due to access to cheaper sources of funds.
2. Eligibility Criteria: Banks have stricter eligibility requirements, often focusing on credit score and income stability. NBFCs, on the other hand, can be more flexible, potentially catering to borrowers with lower credit scores, though this may come with a higher interest rate.
3. Loan Processing: Banks generally have a slower loan approval process due to stringent checks and verifications. NBFCs often boast faster processing times, making them suitable for urgent financial needs.

To make you understand the basic difference between a loan from a bank and an NBFC, look at the table below:

The Two Sides of the Coin: Advantages of Each

Bank Loans:

• Lower interest rates: Save money in the long run.
• Established track record and credibility: Peace of mind with a reputable lender.
• Wider range of loan products: Cater to diverse financial needs.
• Safety and security: Deposits and loans are protected under RBI regulations.

NBFC Loans:

• Easier loan approval: Ideal for those with imperfect credit history.
• Faster processing times: Get the funds you need quickly.
• More flexible repayment options: Some NBFCs may offer customized repayment

Shifting Preferences and the Rise of NBFCs

In recent years, there has been a noticeable shift in customer preferences between banks and Non-Banking Financial Companies (NBFCs) in India, particularly among Micro, Small, and Medium Enterprises (MSMEs). The decision often depends on the specific needs and circumstances of the customers [2].

MSMEs, which are vital to India’s economy, increasingly favor NBFCs due to several advantages these institutions offer. NBFCs have been instrumental in bridging the significant credit gap left by traditional banks, which has been about 14% access among MSMEs, compared to the needs [2]. They have achieved a 24% year-on-year increase in fresh, unsecured business loans as of March 2023 [2]. The appeal of NBFCs lies in their more streamlined and efficient loan application processes, flexible collateral requirements, swift fund disbursals, and the provision of tailored financial solutions that meet the specific needs of MSMEs [2]. This responsiveness and flexibility make NBFCs particularly attractive to businesses that may not meet the stricter criteria of traditional banks or need quicker access to funds to seize business opportunities.

The Strengths of Traditional Banks

On the other hand, traditional banks, regulated under the Banking Regulation Act, offer the advantage of lower interest rates and are perceived as more secure, particularly because they are part of the deposit insurance system, which is not applicable to NBFCs [2]. Banks also have extensive branch networks, which can be beneficial for customers seeking in-person service [2]. However, their loan processing is generally slower due to more stringent regulatory compliance and a more complex approval process [2].

Choosing the Right Lender:

There’s no one-size-fits-all answer. Consider your creditworthiness and the urgency of your financial needs.  Compare interest rates and fees offered by both Banks and NBFCs. If you have a good credit score and are comfortable with a traditional approach, a Bank loan might be the way to go. But if speed and flexibility are priorities, and you’re comfortable with potentially higher interest rates, NBFCs could be a viable option.

If you are considering a personal loan and are confused about the lenders, you can apply through Credmudra; they will match you with the right lender in 3 minutes!

Credmudra is a financial institution that helps people get loans. They  has a 90% disbursement rate and a 100% paperless application process. It also claims to be able to prequalify you for loans without affecting your credit score.

Here are some of the benefits of using Credmudra:

You may be more likely to get a loan approved through Credmudra than if you applied directly to a lender.

You can apply for a loan online without having to fill out any paperwork.

You can check your loan rates without affecting your credit score.

Sources:

[1] CEIC Data (Data on Loan Market Size)

[2] Industry Report or Credible Source (Data on NBFC Advantages for MSMEs)

Advertisement