Banks and non-banking finance companies (NBFCs) play a similar role in the financial world. Both provide loans to customers with varied profiles and leave no stone unturned in reaching out to potential customers who are in need of funds. As a borrower thus, you may find it confusing to make a choice between a bank and an NBFC. To get more clarity and make an informed choice between the two, let us go about learning the differences between these two financial entities.
Difference between banks and NBFCs
All commercial banks in India are incorporated under the Banking Companies Act, while all NBFCs are governed under the Companies’ Act of 1956. As NBFCs are not incorporated under the banking act, they cannot accept deposits of any kind. This acts as a disadvantage against banks who have ready access to low cost deposits in the form of current and savings account. As a result, when it comes to personal loan interest rate, banks are likely to have an advantage as compared to NBFCs.
That having said, the situation has improved over the past few years when the business model of NBFCs has strengthened considerably. With the growth of the mutual fund industry and the increasing popularity of securitisation as a borrowing tool, funding sources have grown for NBFCs, thus bringing down their cost of funds. Thus, unlike the past, when NBFCs were at a significant disadvantage to banks, where cost of funds were lower, the gap in lending rates of banks and NBFCs is decreasing steadily. As a result, personal loan interest rates at banks and NBFCs is nearly at par and even better in some cases.
NBFCs are more accommodating
Banks are more stringent when it comes to unsecured lending. Thus eligibility criteria for personal loans including paperwork and scrutiny is much higher in banks as compared to NBFCs. The other major criteria for loan sanctioning at NBFCs is a high CIBIL score. If your CIBIL score is not satisfactory between the level of 750 and 900, it is unlikely for your loan application to even go through. On the other hand, NBFCs are more accommodating with eligibility criteria and lower credit scores. Thus, when you are looking for a personal loan for low CIBIL score, an NBFC may just be the right place to seek a loan.
Finally, NBFCs have faster disbursal processes in place. This make accessibility of a personal loan a much more easier and smoother process. This can indeed seem like a blessing when you are facing a financial crisis and are in urgent need of funds. More often than not people apply for a personal loan when they are in dire straits and need some funds on an immediate basis. NBFCs have recognised this need and have stepped up their lending game over the past few years. As a result, NBFCs have risen greatly in popularity as compared to banks especially with people seeking personal loan for low CIBIL score.
How should you decide?
When it comes to making a choice between a lender when you are in need of a personal loan, it often boils down to factors such as who offers the best rate of interest, lower processing fee and faster disbursal. Thanks to a wealth of information online you can carry out your initial research by using the services of web aggregators. If you have a stellar credit score you may be in a position to negotiate on factors such as waiving off processing fees and even lowering of interest rate. In a nutshell, what we are trying to say, is that even if you are in dire need of funds, be discerning in your choice and do not take the first offer that comes your way.
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