If you are looking for a small business loan, there are many financial institutions you can choose to get a loan from. Thanks to the efforts of the Government of India, it is easy to find and apply for an MSME loan in India. The government has made it a mission to provide MSMEs with better access to credit. While choosing to apply for a business loan, one thing that always confuses an MSME is whether to choose banks or NBFCs for business loans.
Both bank loans and NBFC loans have specific offerings tailored to meet the credit needs of small businesses. But one trumps the other in terms of eligibility, disbursement, etc. To learn the difference between bank loans and NBFC loans, you first need to know the difference between both these institutions.
What is a bank?
A bank is a financial institution or an organisation that is legally permitted to receive monetary deposits and lend money in the form of loans. It also provides financial services like deposit boxes, wealth management, currency exchange, etc. There are different kinds of banks namely retail, commercial, corporate and investment banks.
Some of the popular banks in India offering small business loans are: State Bank of India, Allahabad Bank, Bank of Baroda, HDFC Bank, ICICI Bank, Axis Bank, UCO Bank, to name a few.
What is an NBFC?
A Non-Banking Financial Corporation or an NBFC is a company involved in activities related to lending like providing loans and advances, credit facility, savings and investment products, trading in the money market, stocks and shares acquisition, currency exchange, etc.
There are different types of NBFCs in India such as:
- Asset finance company
- Infrastructure finance company
- Micro finance company
- Loan company
- Mortgage guarantee company
- Investment company
- Core investment company
- Housing finance company
The first four on the list are the entities responsible for issuing business loans.
Some of the popular NBFCs in India offering small business loans are: IIFL Finance, Lendingkart, Bajaj Finserv, Tata Capital, etc.
Difference between a bank and an NBFC
Even though both deal with lending there are some key differences between the institutions:
|Services include savings and investment plans, stocks, insurance facilities, mutual funds, business loans, etc., but cannot provide cheque payments, demand draft facility, credit cards, etc.||Banks provide services in loan advancements, guarantees, credit card facilities, remittance of funds, cheque payments, etc.|
|NBFCs accept deposits and securitises them into interest bearing securities||The main activity of a banks is to accept deposits and offer loans|
|NBFCs are not permitted to accept Demand Deposits||Banks can accept Demand Deposits|
|NBFCs are not required to maintain ratios like Cash Reserve Ratios (CRR) and Statutory Liquidity Ratios (SLR)||Banks must maintain ratios like CRR and SLR|
|NBFCs are not legally allowed to create credit||Banks are involved in creating credits|
Banks or NBFCs: Which is better for business loans?
Bank loans are the most preferred form of loans for businesses across India. According to a BCG report, NBFCs loan growth reviving post pandemic was traced at 15.1% lower than banks which stood at 20.5%. The growth rate is favouring banks because NBFCs, fintech platforms like online money lending websites are relatively new organisations lending credit. However, there are several advantages that NBFC loans offer over bank loans:
- Easy loan application process
Banks, as you know, have a strict application process and often require a significant amount of time for the loan to get sanctioned. NBFCs on the other hand have quick approval and disbursement process. So, business owners who are looking for instant loan approval can approach NBFCs for their credit requirements.
- Competitive interest rates
The interest rates demanded by banks are linked to the Marginal Cost of Lending Rate (MCLR), which is mandated by the RBI. This simply means that banks do not have the freedom to increase or decrease the rate of interest. Since NBFCs do not come under the purview of RBI, NBFC business loan interest rate is decided by themselves. Therefore, NBFCs set their own terms and conditions including the interest rate being demanded for loans.
- Relaxed eligibility criteria
Both financial institutions check credit scores and repayment capacity of the businesses. But banks have strict eligibility criteria for a loan application as they have to follow the lending rules. On the other hand, NBFC loan eligibility follows relaxed criteria. Their simple and customer-friendly terms and conditions are attracting more business owners towards NBFC loans.
- Relaxed credit evaluation
One of the bank requirements for a business loan is to check the credit score to evaluate a business’s credit history. However, NBFCs follow a different approach. They have their own credit evaluation system in place which looks at multiple factors to determine a business’s creditworthiness. NBFCs consider the industry the applicant belongs to, number of years in the same business, bank statements, turnover, and ITR filed for two to three previous years to assess the creditworthiness.
There are many NBFCs and banks for business loans. Finding top banks for business loans can be done by going to website of banks and looking at their offerings. Asking the bank’s clients about the loan process might also be of great help. For small business loans it is necessary to choose the best NBFC for business loans in India to avail the advantages NBFCs give when it comes to loan sanctions.
According to the list of 16 upper layer non-banking finance companies published by RBI in 2022, these are some of the top NBFCs in India: LIC Housing Finance, Bajaj Finance, Mahindra & Mahindra Financial Services, Shriram Transport, Tata Sons and L&T Finance.
Business loans can be obtained from the best banks for business loans in India and NBFCs. Before choosing between banks or NBFCs it is better to find and compare the loan process, interest rate, the repayment process, etc., for different institutions. Take the help of services like Business Loans from Tata nexarc to find attractive unsecured loans from leading banks and financial institutions in India.