Is NBFC Better Than Banks For Business Loan?

Alongside government efforts, financial institutions – commercial banks and NBFCs – have designed purposeful financing options. Business loans are prime examples here, helping entrepreneurs secure necessary funding for their ventures.

However, a common confusion that persists with prospective borrowers is whether to go with a bank or an NBFC for financial assistance. To resolve this fix, one needs to understand the difference between the two subtypes of lending institutions and decide accordingly.

The MSME sector contributes to about 30% of the Indian GDP.

It reflects the significance of this sector in the Indian economy. Understanding its importance, the government has taken several necessary measures and implemented policies to maximise this sector’s growth.

Bank vs NBFC – Which Way Forward?

Here are some notable differences between banks and NBFCs –

• Regulatory Body

Banks are regulated under the guidelines of RBI, whereas NBFCs have no such governing bodies. However, they follow the Companies Act and instructions from RBI and SEBI to conduct their operations.

• Loan Eligibility Parameters

NBFCs levy flexible and less stringent eligibility norms for any credit type. In contrast, the eligibility parameters exercised by banks are stricter.

• Benchmark Rate

The benchmark rate for banks depends on the base rate and key policy rates by the RBI. Contrarily, NBFCs can use their own calculations to determine interest rates. Nonetheless, both types of financial institutions follow RBI’s policies to determine their business loan interest rates.

• Product Portfolio

In terms of services, banks and NBFCs offer similar types of financing options. But the only difference here is that NBFCs cannot accept deposits, whereas banks can. Also, NBFCs cannot offer any transaction services, whereas banks can.

• Creation Of Credit

NBFCs cannot create any credit in the system, whereas commercial banks can.

Based on this comparison, one can say banks and NBFCs are two distinct entities, even though they offer similar financing services. However, recent trends show entrepreneurs are more inclined towards NBFCs for any financial assistance.

• A recent report suggested that, between 31st March 2009 and 31st March 2019, NBFCs have registered a CAGR of 18.7% compared to scheduled commercial bank’s 10.7%. Moreover, in March 2020, the asset size of NBFCs stands at Rs.51.47 lakh crore.

This preference received by NBFCs is mainly due to the convenience they offer. Read on to know more.

Top 4 Reasons To Prefer NBFCs For A Business Loan

Here are top reasons to choose NBFCs over a traditional bank for a business loan –

1.The Eligibility Criteria Are Lenient

The eligibility criteria for loans from NBFCs are less stringent, which helps individuals secure a loan without much hassle. Moreover, applicants with unsatisfactory credit scores can also qualify for credit with these lending institutions.

Whereas, with banks, the process is relatively complicated as they feature stringent eligibility parameters. Typically, these financiers are reluctant to accept any loan application with a credit score below 650, which can be challenging for some.

2.Quicker Loan Processing 

Owing to their lenient eligibility parameters and minimal documentation, NBFCs have streamlined their loan application process. The entire process is less complicated, resulting in better customer convenience.

With mobile apps like MANDII, this process is now even more seamless. Once you upload the documents, it will select a list of lenders based on the credentials. You can complete the process online by selecting a lender per your requirements and receive approval quickly. Such apps offer end-to-end financing solutions, so you won’t have to deal with multiple lenders to obtain financing.

Whereas, with strict eligibility parameters and lengthy documentation of traditional banks, the loan application becomes lengthy and, at times, inconvenient. 

3.Interest Rates Are Competitive

Rate of interest is one of the primary reasons to opt for NBFCs while shopping for a business loan. In recent times, these lending institutions have managed to align their interest rates with that of commercial banks, which has been an enormous boost for them. When you consider the other benefits along with such attractive rates, NBFCs pave the way for a convenient and affordable borrowing option.

4.Lenient Rules And Regulations

By not being under the careful watch of RBI, NBFCs are not required to follow stringent rules and regulations. Resultantly, they can facilitate loans at more convenient terms when compared to traditional banks. It includes exemption of additional charges, flexibility in repayment options, etc. Also, NBFCs can customise their offerings for borrowers with higher credit scores and reputable credit history.

On the other hand, banks are strictly regulated by RBI, which does not always allow them to personalise services per a customer’s convenience and act accordingly.

The benefits of a business loan allow entrepreneurs to find the necessary funding for their company. Additionally, with NBFCs, they can enjoy better loan terms that make repayment convenient and affordable.

Bottom Line

Bank and NBFCs are two distinct types of financial institutions with different working principles. In this regard, one can learn the differences and advantages offered by them to decide where to source a business loan.