Do you remember how you used to shop until a few years ago? You’d have to take out time to go out, visit multiple shops and then decide where to buy your essentials keeping in mind the quality offered and the prices. What do you do now? You just tap on your phone, apply filters based on your budget and requirements and voila, the best fits appear right in front of you. This is the case with loan shopping as well. The right loan for you is no longer sitting with a bank representative but on your fingertips. There was also a time when loans implicitly meant banks. Today, that scenario has shifted as well. We have non-banking financial companies, better known as NBFCs who are also helping people with their money requirements. Now let us understand everything about Banks and NBFCs.
|Meaning||An NBFC is a company that provides banking services to people without holding a bank license.||A bank is a government authorized financial intermediary that provides banking services.|
|Regulated under||Companies Act 1956||Banking Regulation Act, 1949|
|Demand Deposit||Not provided||Provided|
|Foreign Investment||Up to 100% investment is allowed.||Allowed up to 74% for private sector banks|
|Maintaining Reserve Ratios||Not essential||Compulsory|
|Deposit Insurance||Not available||Available|
|Transactional Facilities||Not provided||Provided|
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Since April 2016, loans offered by banks that have floating rates are linked to the Marginal Cost of Lending Rate or MCLR. You can view the MCLR as a bank’s lending benchmark. The interest rate that they charge from their customers depends on this rate. NBFCs on the other hand, are not linked to the MCLR. They are computed by the Prime Lending Rate (PLR). This lies outside the scope of the RBI. Banks are not allowed to lend at rates below the MCLR but PLR-linked loans do not have such constraints. This allows NBFCs enhanced flexibility with their interest rates as per their selling requirements.
The loan amount is the amount that your lender provides you. However, the value of the loan would be the total amount you are spending on acquiring an asset. For example, in the case of a home loan, the registry would be a part of the value. Most banks are allowed to cover only 80% of the net value. But an NBFC can pay for the entire amount.
Although banks are mostly associated with larger amounts and lower interest rates. NBFCs like DMI, IIFL, Clix, PaySense are providing customers with competitive interest rates and great offers on personal loans.
In the past few years, NBFCs have seen exponential growth. Both in terms of the services they are providing and also in terms of the demands they are receiving. Also, the most interesting part to note here is that most NBFCs do not have a strict collateral requirement and offer quick loans. This is the major reason for them becoming popular. If there is anything else that you’d like to know about Banks and NBFCs, do let us know in the comment section below. Until next time!
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