NBFC vs BANKS
The often heard query from the laymen is, what is the distinction between a bank and a non-bank finance company? Say, for example, what the difference between ICICI Bank and Mahindra Finance will be. Yeah, banks and other non-banking financial institutions are distinct in certain operating fields.
What is a NBFC?
'A non-bank financial company (NBFC) is a company incorporated under the Companies Act of 1956, which carries out loans and advances, acquisitions of shares /stocks /bonds debts /securities issued by the government or a municipal authority or other fair and reasonable securities of a similar nature;Leasing, recruiting, insurance, but not involving any institution specifically engaging in farming, manufacturing operations, the purchasing or selling of products (other than securities) or the distribution of utilities and the sale/purchase/construction of real estate. -The RBI.
Non-banking investment institutions play an extraordinary role in the economy by carrying out a wide variety of financial operations. NBFCs are a heterogeneous organisation offering a range of services, ranging from microfinance to insurance. They have insurance, grant MFI loans, fund utilities, etc.
NBFC gold loans, chits, etc. are common examples of NBFCs.
Other characteristics of NBFCs are:
● NBFCs are licenced to accept/renew public deposits for a minimum duration of 12 months and a maximum period of 60 months. Deposits repayable on demand cannot be accepted.
● The deposits with NBFCs are not insured
● The disbursement of deposits by NBFCs is not guaranteed by RBI.
Banks v/s NBFC
Loans have since become more available to borrowers as soon as they meet the necessary qualifying requirements. The preference between banks and NBFCs is a big concern. In its Financial Stability Survey, the RBI reported that NBFCs are outperforming banks, growing customer loyalty by 15%.
There are several variations and some benefits of NBFC over the banks. Many of the variations
are as follows:
1. Although banks fall under the RBI-Banking Act, 1956, NBFCs are registered under the Companies Act, 1956.
2. In comparison to banks, NBFCs cannot accept demand deposits.
3. The management of the reserve ratio is only mandatory for banks.
4.NBFCs cannot accept demand deposits
5.NBFCs do not form part of the payment and settlement system and cannot issue checks on their own
6.NBFCs cannot issue claims as banks.
7.Deposit insurance of Deposit Insurance and Credit Guarantee Corporation is not available to NBFCs depositors, as is the case with banks.
8.Although banks are organised under the Banking Companies Act, NBFC is incorporated under the 1956 Business Act.
Few of the benefits of NBFC over banks are as follows:
1. Quick lending sanctioning method.
2. Flexible terms and conditions of use.
3. Attractive qualities and advantages both current and existing borrowers.
4. Provides a variety of personalised loans and other financial goods.
5. Better customer support.
6. Brings cheaper loans at relatively lower prices.
Difference between NBFC and Bank Fixed Deposits
Now we all know that both banks and NBFCs are taking fixed deposits. There are, however, certain variations between the two. For eg, NBFC's fixed deposits are usually classified by the country's rating agencies. On the other hand, the bank's fixed deposit is not valued by the credit rating agencies.
Another distinction between the NBFC and the bank's fixed deposit is security. The bank's fixed deposits are covered, while the NBFC's fixed deposits are not insured. In fact, if the default is Rs 1 lakh and the Deposit Insurance and Credit Guarantee Corporation of India pays the insurance sum on the bank's deposit.
On the other hand, if the NBFC defaults on its payments, you will forfeit your principal and insurance sums, which is why you can go for highly valued stable fixed deposits only. Another point worth noting is that NBFCs appear to deliver better interest rates relative to bank deposits.
Is there a difference in lending between banks and NBFCs?
As far as lending is concerned, banks tend to approach both businesses and retailers. On the other hand, NBFCs are more targeted to the supermarket market. This may be, for example, in car financing, consumer loans, etc. You don't see that as an example of loans to major power ventures.
Another distinction being the question of credit cards. Banks also issue credit cards of various types, based on the customer's preferences, whereas NBFCs do not.
Difference in flexibility of terms
NBFCs often have an advantage over the banks in terms of the convenience they deliver on the terms of the loan. Unlike banks, you might skip a long paperwork when you apply for a loan with NBFCs. Also, lenders like Bajaj Finserv allow you to take Home Loan easily by applying online, although you might be able to apply online with some banks as well.In addition to the versatility of the application, you can apply a premium of up to Rs.10 crore for a tenor of 25 years within 72 hours of your application with renowned NBFCs.
Differences in processing time
Both banks and NBFCs are very comprehensive in their handling of loans, which often requires strict verifications. However, along with online application facilities where you can also submit scanned copies of all required records, the processing time for NBFCs is typically lower than for banks. Generally, in the event of an NBFC, you will obtain a penalty within 72 hours of your filing.This helps you to book your dream home without any hesitation.
Scoring is another key distinction between NBFCs and banks. For eg, NBFC deposits are classified, while bank deposits are not rated. The latter is known to be quite healthy, while the former is not. It should also be noted that the deposits of Non Banking Finance Corporation are not secured while the deposits of the banks are not insured.It's a smart idea to review the scores of NBFCs before you invest. Generally, those of high quality are rated AAA, which guarantees the stability and prompt payment of interest and principal sums. So check the same thing before you invest.
Acceptance of deposits
First, banks may offer virtually all financial services and goods that are usually licenced to them. They will accept deposits for demand (demand deposits have high liquidity and are considered as good as money). The NBFCs cannot accept deposits on demand.
Only basic functions devoted to them can be given by NBFCs. There are few deposits (other types of deposits) that accept NBFCs, but they are strictly governed by the RBI. NBFCs are permitted to accept/renew public deposits for a minimum duration of 12 months and a maximum period of 60 months.Just 254 deposits take NBFCs out of 12,000 registered NBFCs. As regards the interest rate, the highest interest rate that the NBFC will pay is 12.5 per cent. Interest can be charged or multiplied during rest periods not less than the monthly rest periods. Repayment of deposits by NBFCs is not assured by RBI.
NBFC or Bank: What's better for a Home Loan?
After 2015, the credit share of NBFCs has risen from 10% to 13 percent. Because of this pattern, it's evident that you're going to come across a variety of NBFCs alongside trustworthy banks while doing your homework to get the best lender to take home loans from. Research NBFC vs. Bank for home loan and select the lender accordingly.Though home loan interest rates have a deciding role to play in which financial institution you select
Banks work exclusively and explicitly under the provisions of the Reserve Bank of India, while NBFCs are formed under the Companies' Act, 1956. This fundamental distinction has a clear effect on the offering of interest on loans to banks and NBFCs. This helps banks to add floating interest on the home loan, which is directly related to the MCLR.
On the other hand, NBFCs fixed interest rates on home loans as per the Prime Lending Rate, which is not related to the RBI. Here you can bargain with the lender to have a high sum approved at a nominal interest rate, since the lender has the discretion to determine the interest more flexibly. However, this depends on you meeting all the necessary eligibility requirements and getting a good credit