Why Banks are better than NBFC

Why Banks are better than NBFC

Home loans are the loans that you take so as to have a good home for yourself. Banks and NBFCs both offer home loans but a bank is regarded as a good option to take the loan from. Everyone wants to lower the expenses related to home loans. So let us know why banks are better than NBFCs while taking the loan.

Let us first know what Banks and NBFC are and their types.

Bank

Banks are the government authorized financial institutes that provide loans to the general public and accept deposits from them.

Types of BANKS

There are three types of banks in India:

Public sector banks

Public sector banks are the banks where the government has major control over them. Here the governments hold more than 50% shares of the bank. There are 18 public sector banks and 1 state-owned payment bank in India. The public sector has an affordable balance maintenance amount.

Private sector banks

Here the majority of the shares are held by private bodies. The private bodies consist of Corporations and individuals.

Foreign banks

These are the banks whose parent company is headquartered in another country but has branches in India too. They have to follow banking rules and regulations of their home country as well as of  India.

NBFC

NBFC is a financial institution that provides various banking services but doesn’t have a banking license. They are not allowed to take demand deposits. The NBFC in India has to be registered according to the Companies Act, 1956.

Types of NBFCs

Following are some of the types of Non Banking Financial Companies in India

1.  Asset Finance Company

An AFC is a company whose purpose is to finance assets consisting of automobiles, machines, generators, and material handling equipment, etc.

2. Investment Company

Such companies business operations consist of dealing in securities.

3. Loan Company

They provide loans and advances for financing working capital and not assets related things.

4. Infrastructure Finance Company

Such companies provide loans for Infrastructure purposes.

Difference between NBFC and Bank

NBFCBANK
Demand deposits are not accepted.Demand deposits are accepted.
NBFC can’t issue self-demand draft.Bank can issue self-demand draft.
NBFCs are not allowed to draw self-cheque on their own.Banks are allowed to draw self-cheque on their own.
NBFC can’t create credits.Banks can create credits.
Transaction facilities are not offered by the NBFC.Transaction facilities are offered by the banks.
Payment and Settlement is not the activity of an NBFC.Payment and Settlements are the main activities of the banks.
100% foreign investment allowed.Only 74% of the foreign investment is allowed.
They are not required to maintain Reserve Ratio.They have to mandatorily maintain the Reserve Ratio.
They are registered under the companies act, 1956 of India.They are registered under the banking regulation act, 1949 of India.

Why Banks are better than NBFCs

Following are the points that will suggest why one should opt for a home loan from a bank rather than an NBFC.

Banks charge low-interest rates as compared to NBFCs

Bank has many sources for getting low-cost deposits. Thus the banks charge low-interest rates.

Banks provide overdraft facility

An Overdraft facility helps you to pay interest in advance. If the tenure of your loan is long, the longer it will take you to pay the interest rates. So to pay the debt as soon as possible you can avail the overdraft facility. The surplus amount in your account can be used to make prepayments. This is very beneficial for family members who can generate regular surplus income. Overdraft facility service is not provided by NBFCs.

Banks can cut interest rates and pass it quickly over to the borrowers

Banks interest rates are depended on MCLR. According to the policy of the Reserve Bank of India, a bank has to mandatorily link customers home loans to MCLR. any change in interest rates caused due to MCLR has to be passed to the borrowers quickly. So if MCLR causes a cut in the interest rate, then it is passed to you quickly. Such quickness is not provided by NBFCs. NBFCs interest rates are influenced by BPLR.

Banks carry out documentation process strictly

Banks take care of your documentation process in a systematic way as compared to the NBFCs.

Prepayment, Foreclosure and Late Payment Charges of NBFCs are high

NBFCs have higher processing fees. Also, the late payment charges of NBFCs can range from 10 to 20% of your EMIs.

Interest rates of some major Bank and NBFCs

BANKS NBFCs 
NameInterest RateNameInterest Rate
State Bank of India8.50-8.60%PNB Housing Finance Limited9.05%
HDFC Bank8.65%Bajaj Finserv Limited9.85%
ICICI Bank8.80%L & T Finance Limited9.90%
Axis bank8.90%Muthoot Finance13.50%

Conclusion

NBFCs attracts high-interest rates and other charges. They also don’t provide overdraft facility to the customers. But on the other hand, banks provide low-interest rates and other charges. Also, they provide overdraft facility and quickly cuts the interest rates as per MCLR.

Thus it can be concluded that approaching banks as compared to NBFCs can be a better option.

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