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NBFCs Vs. Banks

Banks have been the common financial institutions around the globe. But there are also non-banking financial companies (NBFCs) that carry out lending and other financial activities. Though there are a similarities between the two, they also vary in many aspects.

NBFCs and Banks have different approaches to lending which are impacted by

1) Regulation

2) Organization Culture

3) Methodologies and approach to lending

This article describes the benefits that NBFCs are able to provide to borrowers over Banks taking into consideration the above three factors

Less Paperwork and other Sources of Confirmation: NBFCs have been able to grow market share particularly for smaller loans achieved through less paperwork and processing requirements. Banks on the other hand require more paperwork. NBFCs will also be willing to look at alternative sources of support paperwork. For example they can use bank statements, GST returns or ITR returns to compute cash flow and repayment potential to support the case.

Dependence Credit Score / Ratings By Banks: Both NBFCs and banks will offer best interest rates to customers with high credit scores. For example if the credit score is 800 and above, rates would be competitive and both banks and NBFCs would lend. However, customers with a lower score or no score may find loans from NBFCs to be less stringent in terms of eligibility requirements. Similarly banks also require companies to be rated for larger loans given they have certain reporting requirements. Also, there may be other requirements such as CA certified accounts which are not required by NBFCs

Interest Rates Flexibility: Bank loans with floating rates are linked to the MCLR, which are linked to RBI-mandated lending rates. NBFCs lend per the Prime Lending Rate (PLR), which is not regulated by the RBI, giving them greater freedom to increase or decrease these rates. Borrowers can benefit sometimes from special, low-interest loans- banks cannot lend below the MCLR.

Loan Quantum and Eligibility: NBFCs may have a more flexible approach to assessing loan eligibility – amounts may be sanctioned as per the borrowers repayment capacity, credit score, etc. They may be willing to lend more against the same amount of security if there is comfort that they get from the cash flows and other sources.