What is an NBFC? Bank vs NBFC Loans

In today’s dynamic financial landscape, securing a desired business loan has become easier than ever, with a plethora of creditors available in the market. Non-Banking Financial Company (NBFC) is a key player in the lending ecosystem. While conventional banks have long been the preferred source for line of credit, NBFC loans are emerging as a viable alternative, providing affordable interest rates, flexible terms, and quicker access to financing to a large customer base. But what precisely is an NBFC, and how does its lending portfolio compare to that of banks? Let us explore the seamless world of NBFC loans, their benefits, and the differences between NBFC loans and traditional bank loans.

What is a Non-Banking Financial Company (NBFC)?

A Non-Banking Financial Company or NBFC is a financial enterprise that provides loan for business but does not hold a full banking license. Unlike banks, NBFCs cannot accept demand deposits (similar to savings accounts) and are not part of the payment and settlement system. They play an important role in the financial industry, providing working capital loans, various credit facilities, retirement planning, wealth management, insurance, and other financial services. Some key highlights of NBFCs:

• The Reserve Bank of India (RBI) regulates NBFCs under the RBI Act of 1934 and the Companies Act of 1956.
• They are divided into four groups based on their operations: asset finance companies, investment companies, lending companies, and infrastructure finance companies.
• The primary objective of NBFCs is to empower and extend financial inclusivity to individuals and businesses who face challenges through traditional banking channels.

What is an NBFC Loan?

An NBFC (Non-Banking Financial Company) offers financial services like loans and credit but cannot accept deposits like banks. NBFC loans are easier to access with flexible terms, catering to individuals and businesses that may not qualify for traditional bank loans, though they often have slightly higher interest rates.

NBFC provide multiple types of loans like personal loans, business loans, vehicle loans, home loans, educational loans, and others. To make funding more affordable and accessible, most NBFCs offer collateral free business loans, with relaxed eligibility criteria, faster approval and disbursement. Traditional banks often have strict qualifying criteria with collateral requirements.

NBFC Loan: Interest Rate and Eligibility

Interest Rates

NBFC loans offer slightly higher business loan interest rates, especially for unsecured loans, compared to banks loans. The interest rates can vary based on several factors, like the borrower’s credit history, loan amount, repayment tenure, and loan type. However, the rate difference is frequently offset by increased credit availability and shorter processing times.

• Personal Loans: NBFCs offer annual interest rates of 12% to 24% for personal loans, depending on the borrower’s profile and credit history.
• Business Loans: NBFCs typically charge 14% to 30% interest rates for business loans per year, depending on the size of the company, amount, and payback period.
• Home Loans: NBFCs home loan interest rates are comparable to or slightly higher than banks, ranging from 8% to 12% per year.

Eligibility criteria

NBFCs, serving rural and underserved sectors, have affordable and relaxed eligibility requirements. Some typical qualifying conditions for NBFC loans are:

• Credit Score: A credit score of 650 or above is suitable for NBFC loans.
• Income Proof: Ensure you carry proof of income, such as salary slips, bank statements, or income tax returns, when applying for a loan.
• Employment Type: Salaried individuals, self-employed professionals, small company owners, and those with intermittent income streams are all eligible for NBFC loans.
• Lending Amount and Tenure: The NBFC loan amount can range from a few thousand to even crores, depending on the type of business, the borrower’s requirements, and repayment capabilities, with tailored repayment tenures.
• Collateral: While some NBFC loans require pledging assets, most creditors offer business loans without collateral.

FlexiLoans is one such Indian FinTech organisation that provides quick business loan. It facilitates online business loans through a completely digital process and requires no pledge of security. Small enterprises can swiftly secure MSME loans with limited credit history, minimal documentation, and zero collateral.

Benefits of Taking Loans from NBFC

1. Flexible Eligibility Criteria: NBFCs have liberal eligibility requirements, making them a go-to option for individuals and organisations with lower credit ratings, irregular income streams, or a limited financial history to line of credit.
2. Quick and Easy Processing: NBFC loans facilitate speedier approval and payout processes compared to banks. It is especially useful for borrowers in need of urgent cash to fund business operations, as it eliminates the hassle of long queues, lengthy documentation, and verification process of bank loans.
3. Customised Loan: NBFC loans are tailored to the individual requirements, making them a desirable option for a broad customer base. Whether you need a personal loan, a working capital loan, or a car loan, NBFCs bring tailored solutions to meet your financial needs.
4. Higher Loan Amounts: NBFC loans are often higher amounts than bank loans, particularly for unsecured business loans. This is beneficial for established enterprises requiring funding for expansion, investing in new projects, or managing ongoing business operations.
5. Less Stringent Credit Requirements: NBFCs frequently lend to borrowers with less-than-perfect credit histories, making them an excellent financial partner for those with lower CIBIL scores or limited cash flow, which may not qualify for traditional bank loans.
6. Innovative Financial Solutions: Many NBFCs, such as FlexiLoans, offer novel borrowing methods through digital lending platforms, making the loan procurement process easy and straightforward. These platforms use advanced technology to evaluate creditworthiness and authorise loans quickly.
7. Flexible Repayment: NBFCs provide flexible repayment choices, allowing borrowers to choose a repayment plan that best suits their financial situation.

A Tabular Comparison of NBFC vs Bank Loans

FAQs

1. What is the difference and similarity between NBFCs and banks?
   NBFCs do not take demand deposits (such as savings accounts) and are not part of the payment and settlement system. However, they both provide similar financial services, such as loans and credit facilities.
2. Are NBFC loans safe?
   Yes, NBFC loans are safe as they are regulated by the Reserve Bank of India (RBI). Always check if your NBFC lender has a registered lending licence before borrowing.
3. Can I acquire a NBFC loan with a poor credit score?
   Yes, NBFCs offer loans to individuals and enterprises with a lower credit history.
4. How do I apply for an NBFC loan?You can apply for an NBFC loan online through the creditor’s website or offline by visiting their branch.
5. What types of loans do NBFCs offer?NBFCs offer a wide range of loans, including personal loans, business loans, home loans, vehicle loans, education loans, and more.
6. Can NBFCs lend to businesses?Yes, NBFCs provide business loans to small, medium, and large enterprises for various purposes, including working capital, expansion, and asset acquisition.

Conclusion

Non-Banking Financial Companies (NBFCs) have become an integral element of our financial ecosystem, providing a diverse range of credit solutions to meet the requirements of the changing times. With their flexible eligibility requirements, quick processing, and creative financial solutions, NBFC loans are a viable alternative to traditional bank loans. Whether you’re a first-time borrower with a weak credit history or a company owner seeking large financing, NBFCs uplift your dreams by providing the desired business loans.

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