The main difference between an NBFC and a bank is that a bank is accountable to the RBI whereas an NBFC is registered under the Companies Act of 1956. A bank offers banking services to the public. An NBFC, on the other hand, is a firm that provides financial/banking services to individuals without being authorised by a bank. Let’s explore further & dive deep into the major differentiating factors between the two.
Key Takeaways:
- NBFCs might offer higher loan amounts but could require additional collateral, whereas private banks offer competitive amounts with varying collateral conditions.
- NBFCs tend to be more flexible in customising loan terms, catering to individual needs, while private banks offer structured packages with comparatively less flexibility.
- NBFCs may have a more limited presence, while private banks typically boast a widespread network, providing greater accessibility to borrowers.
- NBFCs generally provide a more straightforward and quicker approval process, contrasting with banks that may follow a more stringent procedure requiring extensive documentation.
- NBFCs may have slightly higher interest rates due to perceived risk, while banks, with their stable financial structure, offer competitive rates.
What Is An NBFC?
NBFC expands to a Non-Banking Financial Company and is a company registered under the Companies Act, 1956, and controlled by the Central Bank, i.e. Reserve Bank of India under the RBI Act, 1934. These bodies are not banks, but they are involved in lending and similar activities, similar to that of banks like administering loans and advances, dealing in the money market, credit facilities, savings, and investment commodities, regulating portfolios of stocks, transfer of money and so on.
In India, these companies developed in the mid-1980s. Kotak Mahindra Finance, SBI Factors, Sundaram Finance and ICICI Ventures are some popular examples of NBFCs.
NBFC has been further divided into three categories:
- Asset Companies
- Loan Companies
- Investment Companies
What Are Banks?
Banks are financial organisations, authorised by the government to manage several banking activities like accepting deposits, granting credit, managing withdrawals, paying interest, clarifying cheques, and administering general utility services to customers. Banks are the apex organisation, which controls the complete economic system of the country. It acts as a financial mediator between the depositors and borrowers, which assures the effortless functioning of the economy.
Difference Between NBFC & Bank: Comparison
| Basis For Comparison | NBFC | Bank |
| Meaning | An NBFC is a company that offers banking services to people but does not have a bank licence. | A bank is a government-licensed financial intermediary that offers banking services to the general public. |
| Incorporated Under | Companies Act 1956 | Banking Regulation Act, 1949 |
| Demand Deposit | Not Accepted | Accepted |
| Foreign Investment | Up to 100% | Up to 74% allowed for private sector banks |
| Payment and Settlement system | Not a part of the system | Integral part of the system |
| Maintenance of Reserve Ratios | Not required | Required |
| Deposit Insurance Facility | Not Available | Available |
| Credit Creation | Credit is not created by NBFCs. | Banks create credit. |
| Transaction Services | NBFC does not provide this service. | Banks provide this service. |
Points Of Difference Between NBFC And Bank
- Authorisation
The first and major difference between NBFC And A Bank is their level of authorisation. NBFCs are not compelled to keep a banking license to equip banking services to the public. In contrast, banks are authorised by governments and their preeminent goal is to benefit the general public.
- Foreign investment
The percentage granted to banks for making a financial investment is 74 per cent while NBFCs can make a financial investment of up to 100 per cent, which is considerably higher.
- Constitution
As discussed above, the NBFCs were formed under the Companies Act of 1956. Banks were registered under the Banking Regulation Act of 1949. Thus, organisations follow different rules and regulations for the arrangement of services.
- Deposit on request
The demand deposit or DD is a fund from which an individual can withdraw a deposit, irrespective of the time, from the financial institution. NBFC does not acknowledge DD for any financial transaction. Nonetheless, these accounts are broadly used in banks for making payments.
- Maintenance of the reserve ratio
The reserve ratio is a part of the depositor’s balance that is supposed to be held by a cash bank as formulated by the central bank in most countries. There is no need for NBFCs to uphold a reserve ratio to function in the economy, but banks need to do this as it influences the money supply in a country over a specific period.
- Payment and balance system
One way how NBFC is different from a bank is that banks are the core of the payment and settlement system while NBFCs are not a part of it.
- Deposit insurance system.
The deposit insurance structure provided by deposit insurance and the credit guarantee company is not accessible for NBFCs, though banks can absolutely use this structure to secure their clients’ money.
Functional Difference Between NBFCs & Commercial Bank For Study Abroad Loans
Banks and NBFCs offer unique terms, interest rates, and services, making it essential to make an informed decision that aligns with your financial goals and academic aspirations. In this exploration, let’s delve into the key factors to consider when choosing between NBFCs Vs. Banks for your abroad education loan:
| Key Factors | Banks | NBFCs |
| Interest Rates | Interest rates can vary but competitive | Interest rates may be higher due to perceived risk |
| Loan Approval Process | Might have a more stringent process, requiring thorough documentation | Generally offer a more straightforward and quicker process |
| Loan amount and collateral | Loan amounts competitive, collateral requirements can vary | Might offer higher loan amounts but may require additional collateral |
| Flexibility in terms | Offer structured loan packages but may have less flexibility | Tend to be more flexible in customising loan terms |
| Co-applicant requirement | Required | Required |
| Transperancy | Are registered with RBI and hence can be fully trusted | Incorporated under Company’s Act 1956 |
| Processing Fees | Banks charge 1-2% of the loan amount. | NBFCs usually have lower or no processing fees |
| Eligibility Criteria | Banks have stricter eligibility criteria, often requiring a higher credit score and stable income | NBFCs have lenient/flexible eligibility criteria as they cater to the global customers |
| Loan Tenure | Repayment periods are usually longer with banks | Some NBFCs provide lesser loan tenure |
Things to consider while taking an abroad education loan: Banks Vs. NBFCs
NBFCs and Banks are good for borrowing an education loan. However, you need to consider some important things before making a decision. Here are some key factors to consider while taking an abroad education loan from banks and NBFCs:
Factors specific to banks:
- Reputation and Brand Value: Established banks may offer more security and trust compared to newer NBFCs.
- Network of Branches: Banks have a wider network of branches, which can be helpful for loan servicing and resolving queries.
- Government Schemes: Banks might offer government-backed education loan schemes with lower interest rates.
Factors Specific to NBFCs:
- Faster Loan Approval: NBFCs usually have a faster loan approval process compared to banks.
- More Flexible Eligibility: NBFCs might cater to education loans with a low CIBIL score or lower income, offering alternative loan options.
- Focus on Specific Courses and Universities: Some NBFCs specialise in education loans for specific courses or universities, offering tailored solutions.
Other Important Factors:
- Moratorium Period: Consider the length of the moratorium period offered during your studies.
- Foreign Exchange Fluctuations: Understand how foreign exchange fluctuations will affect your loan repayment.
- Post-Study Employment Opportunities: Research your career prospects and potential salary after graduation to ensure you can comfortably repay the loan.
The best lender for you depends on your individual needs and circumstances. Carefully compare different loan offers based on the factors mentioned above before making a final decision. Consider seeking professional advice from a financial advisor to help you choose the best option for your abroad education loan.
List of major NBFCs providing Education Loans
Almost all nationalised and private banks offer education loans in India. However, given below is a list of NBFCs offering cheapest education loans you can check out to borrow education loans for studying abroad.
- Avanse Financial Services: Offers study loans covering tuition fees, living expenses, and other related costs. Avanse is known for its competitive interest rates and flexible repayment options.
- HDFC Credila: Credila, a subsidiary of HDFC Ltd., specialises in education loans and is known for its expertise in funding international education. They provide loans for various courses, including undergraduate and postgraduate programs.
- InCred: InCred is a new-age NBFC that provides a range of financial services, including education loans for students planning to study abroad. InCred focuses on offering hassle-free loans with competitive interest rates.
- Auxilo Finserve Pvt Ltd: Auxilo is a prominent player in the education finance sector, catering to the diverse needs of students pursuing higher education overseas.
- Prodigy Finance: With a global focus, Prodigy Finance connects individual and institutional investors with students seeking study abroad loans. Notably, Prodigy Finance does not require collateral, and its risk assessment model evaluates a student’s future earning potential.
- Credence: Credence, with its expertise in education finance, offers tailored solutions for students aspiring to study abroad. The NBFC provides comprehensive support for various courses and is recognised for its commitment to simplifying the loan application process.
- MPOWER Financing: With a commitment to inclusivity, MPOWER provides loans without requiring a co-signer or collateral. The institution’s emphasis on supporting students from emerging markets and its flexible repayment terms make it an attractive option for those navigating the financial aspects
Well, it’s a wrap! While NBFCs and banks play a significant role in facilitating study abroad education loans, it’s essential to carefully evaluate and choose the one that suits your needs. Conduct thorough research, compare offerings, and seek guidance from financial advisors to make an informed decision.
FAQs
Q.1) Is it safe to take an education loan from NBFC?
Ans- Yes, it is safe to take education loans from NBFCs, as they are regulated under the Company Act 1956.
Q.2) What are the disadvantages of taking out a loan from NBFC?
Ans- Of course, there are also drawbacks to taking out a loan from an NBFC. As they are not regulated like banks, they may not give you the same level of protection. This could put you at risk if something goes wrong with your loan or if the company goes out of business.
Q.3) Which NBFC is best for education loans?
Ans- NBFCs like Auxilo, Avanse, Credilla, Credence, Prodigy, and MPower Finance are safe and best for an education loan.
Q.4) Who is eligible for NBFC loan?
Ans- To be eligible for an NBFC education loan, you should be at least 20 years of age, have a good credit score, and should have a co-applicant if not salaried.
Q.5) Is NBFC better than banks?
Ans- Though NBFCs are not regulated like banks, they are flexible in terms of eligibility, documentation, etc. Additionally, the loan approval time is faster than banks. However, it depends upon your financial appetite and requirements to decide.
Q.6) What is the major difference between bank and NBFC?
Ans- While a bank is an authorised government entity offering banking services, an NBFC is a company providing similar services to the public without possessing a banking license.
Q.7) Which is better bank or NBFC?
Ans- Banks typically provide lower interest rates owing to their access to cost-effective funds, whereas NBFCs may offer greater flexibility in eligibility criteria and documentation requirements. Choosing between the 2 depends on your financial requirements and study abroad plan.
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