NBFC or Bank: Which is Better for Business Loans?

27 Jan 2021

Over the past decade, the financial landscape in India has seen a notable shift. Non-Banking Financial Companies (NBFCs), such as Oxyzo, have gained significant popularity due to their numerous advantages, making them the preferred choice for individuals and businesses seeking loans. This article explores the differences between NBFCs and banks, with a focus on how NBFCs like Oxyzo offer distinct benefits, especially for small and medium-sized enterprises (SMEs) in India.

What are the difference between nbfc and bank? 

While both are financial service providers in one form or another, there are significant differences between them. Although the banking sector has evolved rapidly, the process of availing business loans remains the same. You can certainly imagine the tiring process of getting a loan approved from banks. NBFCs have taken the lead in these areas by introducing quick and instant business loans.  

Here are some of the factors that differ when it comes to NBFCs and banks. 

1. Quick disbursal of funds 

If you opt for banks for business loans, you will waste much of your working days. It is because of the tiring paperwork and processes involved behind that. The massive paperwork in the banks makes the approval and disbursal process lengthier. As compared to this, the lending norms of NBFCs are smooth. They have relaxed requirements and minimum documentation. With this less complicacy in loan processing, NBFCs are said to lend higher satisfaction among customers. 

2. Simple eligibility criteria 

Opposite to banks, NBFCs follow a relaxed approach to loan eligibility. They accord the customers more straightforward and faster financing. Despite having a low credit score, one can easily qualify for a loan from an NBFC. Also, lending 100% loan amount provides the NBFCs with an edge over traditional banks. Many of these financial institutions disburse the entire loan amount without requiring any collateral.

3. Competitive Interest Rates 

Interest rate is one of the main concerns for loan seekers. And this is where the NBFCs have surpassed banks. Compared to traditional banks, NBFCs give competitive rates of interest on business loans. Their base interest rate is stipulated based on the prime lending rate, which is not regulated by the Reserve Bank of India. Non-financial institutions enjoy greater flexibility and can vary their rates of interest in SME loans

4. Less Rules and Regulations

As NBFC are under the Companies Act, the rules and regulations for lending are not as stringent as banks. It supports borrowers to get loans quickly. And the less complicated loan processing makes borrowers highly satisfied. Of course, the default risk is high with NBFC; interest rates and other charges will be priced according to the NBFC. Even the loan amount approved will be relatively lesser than the collateral value. This is due to the high risk of default.

5. Minimum documentation and paperwork

NBFCs possess an incredible share of non-security small business loans. They can garner the attention of loan seekers due to minimal documentation and paperwork. On the other hand, Banks follow more stringent rules and regulations when it comes to paperwork. If a borrower fails to furnish the required documents, banks may refuse to process the loan application. 

Key Takeaways

In summary, the differences between NBFCs and banks in India highlight the significant advantages offered by NBFCs, especially for SMEs. Their ability to provide quick disbursal of funds, simple eligibility criteria, competitive interest rates, and streamlined processes make them a preferred choice for borrowers. While there may be higher risks associated with NBFCs, their contribution to the Indian economy, as recognized by the Reserve Bank of India, underscores their importance in meeting the credit needs of essential sectors. As a result, NBFCs continue to outperform traditional banks in terms of providing accessible and efficient business loan solutions.

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