How Are NBFC’s Better Than Banks?
Let’s know a bit about banks and NBFCs first
All the necessary aspects of society are served by financial institutions. Such institutions not only affect people, but also businesses and governments.
Banks and NBFCs are the most renowned financial institutions for every financial necessity but have you ever wondered how they differ or resemble one another?
A bank and a Non-Banking Financial Company (NBFC) are two distinctive financial institutions with very different approach in terms of – business models, operations, and regulatory requirements.
Where a bank is an authorized government financial institution, an NBFC is a company that performs similar banking operations but without a granted banking license.
On the one hand, Banks act as financial mediators between depositors and borrowers. They ensure the smooth functioning of the economy in the country.
On the other hand, NBFCs are regulated by the Reserve Bank of India under the RBI Act, 1934. For commencing the activities of an NBFCs, registration is mandatory.
Services Offered by NBFCs
- Loans and advances
- Saving and investment plans
- Credit facilities
- Insurance business
- Chit fund business
- Money transfer service, etc.
Services Offered by Banks
- Advancements of loans
- Discounting on bills of exchange
- Collecting and paying the credit instruments
- Guarantee by banks
- Credit & Debit cards
- Funds remittance, etc.
How are NBFCs better than banks?
The NBFC sector has significantly transformed over the past few years. Through leveraging technology in finance and particularly in the field of credit deployment, the NBFCs have outperformed banks in the mortgage sector.
They have carved a niche for themselves by understanding the customer needs, customizing the products for different customer segments, and expanding into underserved areas.
Gone are the days when one used to stand in lines for getting loans from banks. The easy accessibility and remote coverage has made NBFCs the most preferred option for borrowers as compared to banks. The major advantages of NBFCs over banks are as under:
1. Flexible eligibility criteria
In comparison to NBFCs, banks usually have stringent lending criteria for providing business loans. They follow a strict verification process and humungous documentation for approving business loan applications. However, NBFCs have a lenient and flexible eligibility criterion for approving business loan applications.
2. Competitive interest rates and charges
Compared to traditional banks, NBFCs offer business loans at a much lower interest rate. It means that there is reduced pressure on business owners when they avail a loan from an NBFC.
Additionally, loan processing fees and other charges levied by NBFCs are also a bit lower as compared to traditional banks.
3. Loan disbursal through a digital process
Most NBFCs have started offering 100% paperless business loans with the help of digital platforms and left very little space for physical documentation.
On the contrary, most banks still follow the traditional method, requiring the borrower to submit hard copies of the documents and be physically present at the branch for verification.
Why NBFCs are not banks?
NBFCs carry out various functions similar to banks, but they are not banks. Some of the significant differences between banks and NBFCs are enumerated below:
- Banks are government-authorized financial intermediaries that aim at providing banking services to the general people. Whereas NBFCs provide banking services to people without carrying a bank license.
- NBFCs are not allowed to accept deposits which are repayable on demand whereas banks can accept demand deposits.
- It is mandatory for banks to maintain reserve ratios like CRR or SLR. Whereas NBFCs are not required to maintain such reserve ratios.
Regulating authorities of NBFCs
The Department of Non-Banking Supervision (DNBS) has been entrusted with the responsibility of regulation and supervision of NBFCs under the regulatory – provisions contained under Chapter III B and C and Chapter V of the RBI Act, 1934.
Deposit-taking NBFCs and Systemically Important Non-Deposit Accepting Companies are subjected to a greater degree of regulation and supervision.
The focus of regulation and supervision is threefold, viz., a) depositor protection, b) consumer protection and c) financial stability.
RBI has been empowered to take punitive action which includes cancellation of Certificate of Registration, issue of prohibitory orders from accepting deposits, filing criminal cases, and winding up petitions under provisions of the Companies Act in extreme cases.
What do we think?
The difference between Banks and the NBFCs is huge – they differ in terms of the types of services they provide, mode of registration or incorporation, regulatory guidelines etc.
NBFCs have come to be regarded as important financial intermediaries, particularly for the small-scale and retail sectors with the growing importance assigned to financial inclusion.
Banking sector has always been highly regulated; however, simplified sanction procedures, flexibility and punctuality in meeting the credit needs and low-cost operations resulted in the NBFCs getting an edge over banks.
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