Banks vs NBFCs: How to pick one while shopping for loans

Adhil ShettyBankBazaar.comBanks and Non-Banking Financial Companies (NBFCs) are both financial intermediaries playing somewhat similar roles in the space of financial products. Yet there are large differences between them and the two maintain their distinct identities.  Borrowers often wonder which one to approach for their loans and why. In this article, we’ll take a look at both entities, their differences, and what to consider while approaching them for loans.  Understanding the differencesBanks and NBFCs may both provide loans and other personal finance products. But banks in India are incorporated under the Banking Companies Act, while all NBFCs are governed under the Companies’ Act of 1956. Since NBFCs are not formed under the Banking Companies Act, they cannot offer banking services like accepting demand deposits, or issuing of cheques and demand drafts. Unlike banks, repayments of deposits by NBFCs are not guaranteed by the Reserve Bank of India. NBFCs are also not part of any payment and settlement system, and to send or receive money between various accounts you can only use banking accounts opened with registered public or private sector banks. When it comes to lendingIn providing loans, both banks and NBFCs have similarities. Both offer retail and business loans depending on the repayment capacity of the borrower. While banks are the preferred choice of the corporate sector, NBFCs target the retail sector more. Loans like consumer durable loans, gold loans, vehicle finance loans, and home loans are all available with NBFC. Major differencesBanks are more stringent when it comes to paperwork, requirements and eligibility while processing your loan application.  Your credit score also needs to be above acceptable levels as well. The upside of going through greater scrutiny is that loan applicants can get lower processing fees and lower interest rates. Banks may also offer discounts to women, which most NBFCs don’t at the moment.NBFCs have a faster loan processing time which means applicants can get loan approval and disbursal faster. NBFCs can be more accepting of lower credit scores, and they balance their risks by charging higher interest rates. While taking home loans as well, the paperwork requirements for NBFCs may be less stringent than banks. NBFCs too must be careful to keep their bad debt and NPAs under check since they lend largely to the retail sector largely and not to the corporate sector.  How to pick one All things considered equal, a loan applicant may find that the repayment tenure and interest rates on offer from banks and NBFCs to be similar. Based on a thorough reading of the loan applicant’s income data, credit history, property documents etc, variations in interest rates and charges may occur.  To select between banks and NBFCs while borrowing, the decision may often come down to who offers you the cheapest loan. The lower the interest rate and processing fees, the cheaper the loan. When it comes to the spectrum of processing fee from low to high, banks tend to be at the lower end. With both banks and NBFCs, depending on your relations and the prevailing economic conditions, you could negotiate to bring down or even waive off processing charges. You must also factor in the costs of pre-payments. There will be banks and NBFCs who will charge you for pre-paying on your loans.   The second consideration is the size of the loan and what it encompasses. For example, in home loans, many NBFCs sometimes cover stamp duty and registration fee—something that is not covered by bank loans for property worth more than Rs. 10 lakh. Loan to value ratio also differs – NBFC may offer higher loan to value ratio.It’s not easy raising funds for a down-payment on a house along with money for registration, repair and refurbishing. Often, having these extra few lakh rupees is the difference between being able to buy a house or not. Therefore a loan that allows you easier access to a larger amount can make your property purchase possible. Therefore, to pick between a bank and an NBFC, you will probably go with the one offering the largest loan for the lowest costs, with the least waiting period and paperwork requirements. Home loan comparison between banks and NBFCs For home loan applicants, here is snapshot of advantages on offer if you choose to opt for a loan with a bank vis-a-vis an NBFC. Advantages with banks •    Discount in interest rates for women borrowers •    Lower processing charges •    Lower interest rates on an average Advantages with NBFCs •    Fast loan disbursal •    Home loans include expenses for stamp duty and registration costs