Difference Between NBFC and Banks

Table of Contents

  1. What is a Bank?
  2. What is NBFC?
  3. Differences Between Banks And NBFCs
  4. Differences Between Banks And NBFC’s Concerning Demand Deposits
  5. Frequently Asked Questions

What is a Bank?

A bank is like a safe place approved by the government where you can put your money. It takes care of your money, gives you loans when needed, helps you withdraw money, process checks, and offer services like online banking. Banks play an important role in the operation of a country’s currency. 

Based on this banks are categorized as follows:- 

  1. private banks
  2. public banks

What is a Bank Loan?

A bank loan is like a financial helping hand from a bank. It’s when a bank lends you money, and you promise to pay it back, usually with some extra money called “interest,” over a certain amount of time. This promise is made official with something called a loan agreement. The different types of loans are Personal Loans, Mortgage Loans, Business Loans, and Education Loans.

What is NBFC?

An NBFC, or Non-Banking Financial Company, is like a cousin to traditional banks. It helps with money matters but follows different rules. It’s watched over by the Reserve Bank of India. NBFCs can lend money and offer credit, much like banks. They’re similar, but they have their own way of doing things in the financial world.

What is an NBFC Loan?

An NBFC (Non-Banking Financial Company) loan is a financial product offered by companies that aren’t traditional banks. These companies help people and businesses by giving them money to borrow. NBFC loans can be for personal needs, businesses, buying vehicles, or getting homes. They’re helpful for people who might not qualify for loans from regular banks. These loans have different rules, interest rates, and ways to pay back, all designed to suit different financial situations.

Differences Between Banks And NBFCs 

Summarizing the difference between Traditional Banks and NBFCs thus giving you a broader perspective.

FactorsNBFCsIndian Banks
MeaningNBFC is a company which provides financial services to people without holding a bank licenseNon-banking financial Companies are regulated by RBI but with fewer regulations compared to banks.
Regulated UnderNon-banking financial Companies regulated by RBI but with fewer regulations compared to banks.Government/Private entities regulated by RBI with strict compliance requirements
Interest RatesLittle High-Interest RateLow-Interest Rate
LoansNBFCs focus on Unsecured LoansGovernment Banks offer up to ₹7.5 Lakh only
Credit ScoreMedium Credit Score may workRequires High Credit Score
FeesHigh Processing FeesLow Processing Fees
Course FlexibilityAccept most universities worldwideLimited to selected/prestigious colleges
Loan AmountUp to Rs 75 lakhUp to Rs 7.5 lakh (unsecured)
Cost CoverageTypically covers all expensesMay decline some costs
Processing TimeUsually within a weekAbout 30 working days
Interest Rates12% to 13% (unsecured)9% to 12% (secured)
Moratorium PeriodVaries, negotiableTypically 6 months
Interest Rate DiscountsNone0.50% discount for female candidates
Processing Fees1% to 2%Around Rs. 10,000
Margin Money100% of costs70% to 80% of costs
Tax BenefitsAvailable under income tax section 80EAvailable under income tax section 80-E

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The Key Differences Between Banks And NBFC’s Concerning Demand Deposits

AspectBanksNBFCs 
DefinitionAllow customers to withdraw money at will without prior notice.Typically not permitted to accept demand deposits.
Regulatory ControlStrictly regulated by the RBI.Partially regulated by the RBI for accepting demand deposits.
Monetary Policy SignificanceSignificant part of the country’s money supply.Not considered as a component of the country’s money supply.
AccessibilityAccessible through various means, including ATM and net banking.Limited accessibility as they cannot issue ATM cards.
Discharge of DepositsMust be readily available for withdrawal by customers.Not typically applicable since demand deposits are not accepted.

Frequently Asked Questions

What’s the fundamental difference between banks and NBFCs in terms of regulation?

Banks walk a well-marked trail with specific rules, like signposts telling them where to go. NBFCs, however, navigate a more open path, where they set their own directions. However, they must tread carefully to avoid any unexpected pitfalls along the way.

How do the services offered by banks and NBFCs differ for individual customers?

Banks typically offer a wider range of services, including savings and current accounts, fixed deposits, and various loans. NBFCs, while also providing loans and investment options, may have a more specialized focus, such as consumer loans or specific investment products.

Are the interest rates on loans from banks lower than those from NBFCs?

Interest rates can vary significantly between banks and NBFCs. Banks can often offer loans at lower interest rates. On the other hand, NBFCs might be more inclined to work with individuals who have faced credit challenges, showcasing their flexibility in providing financial solutions.

What advantages do NBFCs have over traditional banks in terms of financial services?

NBFCs offer unique financial solutions. They are more flexible and responsive than traditional banks. You can access credit even if your credit history isn’t perfect. They specialize in various financial areas and provide quick approvals. They offer personalized service and innovative options with less paperwork. NBFCs provide diverse lending choices and take calculated risks. But be cautious, as these benefits come with their own set of risks.

What are the main distinctions in the loan approval process between banks and NBFCs?

Banks usually follow a structured process. They ask for a lot of paperwork, pay close attention to your credit score, and may take some time to decide.

In contrast, NBFCs are more flexible. They require less documentation, look at your credit score along with other factors, and typically make quicker decisions.

In simple terms, banks have a strict procedure, while NBFCs offer a more adaptable approach to loan approvals.