Banks or NBFCs: Where should I Apply for a Personal Loan?

Updated on: 14 Dec 2021 // 26 min read // Personal Loans
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Personal Loans can be borrowed from many sources. The primary form of lending companies can be divided into either banks or NBFCs. Many people tend to get confused if they should borrow from a bank or an NBFC because they are unaware of how the two are different. If you are also in the same dilemma, here is a small guide to help you make the correct decision.

Characteristic differences between Banks and NBFCs

First of all, banks are allowed to take deposits from the general public. They will then lend out this money to the people who come to them seeking home loans and Personal Loans etc. NBFCs, on the other hand, are not allowed to raise capital through deposits. They are allowed other methods to raise capital, including access to financial markets and commercial paper, which they can then lend out to customers.

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Banks are formed and regulated under the Banking Regulation Act by the Reserve Bank of India. NBFCs, on the other hand, are formed under the Companies Act, like any other company involved in the production of goods or delivery of services.

RBI requires all the banks to maintain a Cash Reserve Ratio and Statutory Liquidity Ratio, where they are supposed to keep a certain percentage of their deposits with the RBI. This is done in order to assure depositors that banks have enough money to service their withdrawal requests and prevent any bank run scenario. Considering that NBFCs are not allowed to take any deposits from customers, they are not required to maintain CRR or SLR because there can be no Bank Run on an NBFC.

Comparison between borrowing from Bank vs. NBFC

Considering that the RBI regulates the banks, the terms and conditions for lending are also defined based upon the criteria laid down by RBI. The terms and conditions of Bank granted Personal Loans will always be very stringent. The Banks will also demand that the credit score of the borrower be excellent. In-fact many banks will outright reject the loan applications for people who do not have a credit score or even have just one or two missed payments in their loan history. Moreover, if you Apply for a Personal Loan from a bank, you will have to be ready to pay very high pre-payment charges and processing charges.

As compared to the banks. NBFCs are much better placed to offer Personal Loans to borrowers in India. They also offer competitive Personal Loan Interest Rates. In recent times, the lending books of NBFCs have grown at a much faster pace than banks. Due to their very nature, NBFCs are able to offer innovative loan products using proprietary decision-making protocols. They are able to judge the applicant’s creditworthiness at much more effective levels as compared to banks. Similarly, NBFCs are also able to provide a much more pleasing customer service experience to the borrowers. Some of the areas where NBFCs excel in lending over traditional banks include but are not limited to the following.

  • The approval process for loan applications is much faster in NBFCs than in banks.
  • Most NBFCs are also offering completely online lending experiences where borrowers do not need to visit the office.
  • Many NBFCs do not differentiate between self-employed and salaried borrowers. Banks, on the other hand, follow stricter norms for lending to self-employed individuals.  
  • NBFCs offer competitive Personal Loan Interest Rates even to people who do not have stellar credit scores, whereas banks will deny Personal Loans to people with credit history-related problems. 
  • New-gen NBFCs are able to offer app-based Instant Loans, which banks are not allowed to offer.  

NBFCs are a faster way of getting loans than banks

Banks have to follow a number of regulatory requirements, and their due diligence process for lending is much longer than any other financial company. Many banks will still require you to fill in a paper form and submit copies of documents along with bringing the original documents to the branch for verification. Even after that, they will take weeks to process the loan and disburse the amount.

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As compared to this, most NBFCs have taken their entire lending process online. You can check your loan eligibility using online tools and apply for the loan on the company website or through their mobile app. Most NBFCs also run promotional offers when loans are originated through select channel partners. Because of their wider lending criteria and through effective use of technology, most NBFCs will process the loan applications in a matter of days. 

If you are looking for a near-instant Personal Loan, your best choice is modern fintech based NBFCs who offer Instant Personal Loans. These are new-age companies that provide the same terms and conditions as well as Personal Loan Interest Rates like any other NBFC, but since they use an app-based lending model, they are able to complete the entire process in a matter of minutes.

With these NBFCs, you have to download their app, fill an app-based application, set your bank account details where you want the loan amount and the loan will be disbursed to your account in a matter of minutes. No bank can match this kind of speedy lending offered by the NBFCs.

Making the right choice

The decision between borrowing a Personal Loan from banks vs. an NBFC should not be made lightly. You must always consider many factors.  First and foremost, identify how long you have to get the loan processed. If you are in urgent need, NBFC is the obvious choice because banks will not be able to match the speed of NBFC.

Similarly, if you have problems with your credit history, which will only be resolved over time, NBFC Personal Loan is your only option.

Banks have the advantage of a large number of branches, thus providing multiple points of personal contact to the borrower. If you think you will need to interact with the lender numerous times personally, banks will be the way to go.

Interest rates of banks may seem lower to some people, but most NBFCs will be able to match the interest rates offered by the banks easily.

Also Read: Best Banks and NBFCs for an Instant Personal Loan


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