Personal Loans by Banks & NBFCs & Comparative Analysis

21 December 2024

You might have seen many advertisements offering personal loans for different purposes – digitally and that too on a fast track. But it’s not a BANK! Then what is it? It is known as the Non-Banking Financial Company (NBFC).

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.

The Reserve Bank of India (RBI) highlights the difference between a bank and NBFC as follow:

NBFC cannot accept demand deposits;
NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.

Different Types of NBFC

The different types of NBFC’s are:

Investment companies
Loan companies
Asset Finance companies
Core Investment companies
Infrastructure Finance companies
Micro Finance companies
Mortgage Guarantee companies
Housing Finance companies

This article compares the personal loans offered by Banks and NBFCs.

Personal loans are offered to help individuals meet various financial needs, such as debt consolidation, medical expenses, home renovations, weddings, travel, education, major purchases, and emergencies. They are unsecured loans, making them accessible without collateral, and offer quick access to funds. However, they often come with higher interest rates, so it’s important to carefully consider the need and cost before borrowing.

Many Non-Banking Financial Companies (NBFCs) in India provide personal loans to people who need money quickly to cover personal expenses. Personal loan interest rates provided by NBFCs are competitive, ranging from 10.99% p.a. to 36.00% p.a.

You can usually get a loan for up to Rs.25 lakh or higher, with a processing fee of 2% to 3% of the loan amount. You should, however, evaluate the personal schemes given by different NBFCs before applying for the one that is best for you.

Differences between Banks’ and NBFC’ Personal Loan

Personal loans from bank vs. NBFC differ in various aspects, such as interest rates, processing fees, eligibility criteria and the loan disbursal process. While banks often offer lower interest rates due to their access to low-cost funds, NBFCs can be more flexible in terms of eligibility and documentation requirements. The processing time and customer service experience may also vary between the two.

Advantages of Taking a Personal Loan from a Bank

Lower Interest Rates
Better Transparency
Access to Additional Services

Disadvantages of Taking a Personal Loan from a Bank

Stringent Eligibility Criteria
Rigid Documentation Requirements

Advantages of Taking a Personal Loan from NBFC

Flexible Eligibility Criteria
Faster Processing and Disbursal
Customised Loan Products

Disadvantages of Taking a Personal Loan from NBFC

Higher Interest Rates
Limited Range of Services

Interest Rate on Personal Loans

Comparative Analysis:

Banks (Public, Private, Foreign) typically offer interest rates ranging from 10.50% to 17.95%, with public sector banks generally on the lower end.
NBFCs show a wider range of interest rates. While some NBFCs like Tata Capital offer rates as low as 10.99%, others like IIFL Finance and HDB Financial Services charge significantly higher rates, up to 36%.
Banks tend to charge lower interest rates compared to NBFCs, especially for well-qualified borrowers with good credit scores.
NBFCs offer more flexibility, but this comes at a higher cost, particularly for borrowers with lower credit scores or those who need quick loans. Their interest rates can be as high as 36% for high-risk loans.
If you have a strong credit score, banks are likely to offer more favorable interest rates, typically ranging from 10.50% to 17%.
NBFCs can offer faster processing times and more flexible eligibility criteria. However, their interest rates can be much higher, especially for loans with quick disbursement or for individuals with less-than-ideal credit scores.

Banks are more likely to provide lower interest rates (typically 10.50% to 17%), making them the preferred choice for borrowers with good credit and those looking for more affordable loans.

NBFCs, while offering faster disbursements and more flexibility, tend to charge higher interest rates, with rates often ranging from 12% to 36%, which can make them expensive options, especially for high-risk borrowers.

Choosing the Best for Personal Loans

With so many options available in the market, how do you choose the best one for your personal loan needs? You can consider the following points to decide: