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Who Should You Choose Between Banks and NBFCs for a Business Loan

Indian banks are formed under the Banking Companies Act while NBFCs under the Companies Act. Both operate under the guidelines mandated by the Reserve Bank of India and thus have stringent policies when it comes to sanctioning loans.

NBFCs tend to disburse loans faster when compared to banks. According to an independent survey that as conducted, when it came to customer satisfaction, it was found that customers at NBFCs were 15% more satisfied in comparison to those who relied on banking services. The same survey also concluded that NBFCs have better financial stability when compared to banks.

Banks also have set categories regarding the businesses to which they sanction loans. This means that if your business does not fall in the categories underlined by the banks, then you cannot look forward to a business finance. This is however, not the case with NBFCs who offer loans to even those with low credit history.

Important Aspects to Consider When Choosing a Lending Institution

Interest Rate is an important parameter to consider when pondering on which lending partner to choose as banks and NBFCs operate on different benchmarks. There are two base rates – Marginal Cost of Lending Rate (MCLR) and Prime Lending Rate (PLR). Banks operate according to MCLR, while NBFCs carry out their interest charges based on PLR.

Interest rates of MCLR based loans change after a certain period of time which is mentioned in the loan documents along with the interval dates. Whenever the interest rates fall in tandem with the market conditions, the benefits are passed on to the customers. The interest rates cannot, however, cannot fall below a certain rate in case of MCLR as is the case with banks. This is not so in case of NBFCs who work according to PLR and they have no such instructions and can thus increase or decrease their interest rates as they deem fit.

NBFCs offer a lot of other benefits along with the loans which are offered such as no processing charges, no part payment or prepayment charges, etc. Many of the NBFCs also provide great flexibility in installment payments to women.

Lastly, the process of business loan disbursal of NBFCs is very quick ans simple. It requires minimal documentation with very competitive interest rates and comfortable repayment tenors.

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