Potential borrowers face a dilemma as to whom to approach for a loan, the PSU (Public Sector Undertaking) banks or the NBFCs (Non-Banking Financial Companies). Both these entities offer various loan facilities such as Home Loans, education loans, Personal Loans, and so on. There are several differences between the loans provided by PSU banks and NBFCs. One should understand these differences as it can make their purchasing decision easier.
The fundamental difference between NBFCs and Banks
At the outset, let us understand the general difference between the PSU banks and NBFCs. Both banks and NBFCs can offer financial services. However, the NBFCs do not have the power to accept deposits or issue cheques and demand drafts as the banks can. The Reserve Bank of India (RBI) regulates the banking industry while the NBFCs are created under the Companies Act 1956. NBFCs are not part of the payment and settlement system whereas banks are. However, both banks and NBFCs offer loans to their customers as per their terms and conditions.
Who should you approach for a loan?
It depends on the type of loan you are seeking. Banks offer a variety of loans ranging from the Home Loans, consumer loans, Business Loans, Personal Loans, and so on whereas NBFCs do not have such a wide range. Specialised NBFCs are available for financing different Types of Home Loans, consumer loans, and Personal Loans. You have some NBFCs specialising in education loans alone.
Let us look at the differences in the loans by NBFCs and PSU banks.
- Interest Rates: The bank floating rates are linked to the marginal cost of funds based lending rate (MCLR). The macroeconomic factors such as RBI-mandated lending rates, cost of funds, and the position of risk-weighted assets and so on influence the MCLR. The NBFCs do not conform to the MCLR concept for the simple reason that they do not accept deposits from the public. The NBFCs follow the Prime Lending Rate (PLR) concept that is not regulated by the RBI. Hence, the NBFCs and the housing finance companies (HFCs) have a higher degree of freedom to increase or decrease their rates as they deem fit. It is why you get some attractive loan products like 0% car loans or 0% interest consumer loans. At the same time, these NBFCs offering high-interest rate loans as well, especially to those customers who do not meet a bank’s loan eligibility criteria. It also explains why NBFCs have the edge over the banks who cannot lend below the MCLR.
- Credit Score Requirements: Both banks and NBFCs offer attractive loans to customers with high credit scores. Specific PSU banks provide differential rates of interest to customers with excellent credit scores. However, customers with lower scores in the range of 500 to 600 find it difficult to get loans from PSU banks. Such customers can approach the NBFCs who are comparatively less stringent than the PSU banks.
- Loan Eligibility: Compared to the PSU banks, the NBFCs adopt a more relaxed approach. They are flexible in their approach towards customers as the NBFCs devise ways to help their customers include the extra costs in the loan. Usually, banks fund up to 80% of the property value when you approach them for a Home Loan. The PSU banks do not include the costs towards stamp duty and registration towards the cost of the house. Some of the NBFCs adopt a flexible approach by including such costs thereby reducing the customer’s burden.
- Documentation: PSU banks have a reputation for being very thorough in their paperwork. Many a time, you observe that these banks go overboard in their approach. The NBFCs adopt a relaxed attitude towards paperwork. Of course, they call for papers but are not as stringent as the banks are. PSU banks do not sanction education loans above 7.5 Lakhs without insisting on adequate collateral whereas the NBFCs have sanctioned education loans up to Rs. 40 Lakhs without any collateral.
- Online Repayment of Loans: PSU banks have the edge over the NBFCs in this regard. These banks offer facilities to the customers to repay their loans You can pay any amount more than the regular EMI (Equated Monthly Instalment) into the loan account without any problem. It is not the case with the NBFCs because most of the NBFCs do not offer the facility of repaying loans online.
The banking industry is a customer-driven industry. Both the PSU banks and the NBFCs need to offer excellent customer services for their survival in the industry. Hence, you see both these organisations going all out to provide excellent customer service.
Also Read: Paid Your Home Loan Completely? Here’s What to Do Next
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