Four Traits Nbfcs Will Look For In You Before Approving A Loan Application


What Is A Non-Banking Financial Company (NBFC)?

A non-banking financial company (NBFC) is a company registered under the Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of shares/stock/bonds/debentures/securities issued by government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business, but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property.

A non-banking institution which is a company and which has its principal business of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner is also a non-banking financial company (residuary non-banking company).

NBFCs Are Doing Functions Similar To Banks. What Is Difference Between Banks & Nbfcs ?

NBFCs are doing functions akin to that of banks, however there are a few differences:

(i) a NBFC cannot accept demand deposits (demand deposits are funds deposited at a depository institution that are payable on demand -- immediately or within a very short period -- like your current or savings accounts.)

(ii) it is not a part of the payment and settlement system and as such cannot issue cheques to its customers; and

(iii) deposit insurance facility of DICGC is not available for NBFC depositors unlike in case of banks.

Is It Necessary That Every NBFC Should Be Registered With RBI ?

In terms of Section 45-IA of the RBI Act, 1934, it is mandatory that every NBFC should be registered with RBI to commence or carry on any business of non-banking financial institution as defined in clause (a) of Section 45 I of the RBI Act, 1934.

However, to obviate dual regulation, certain category of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI viz. venture capital fund/merchant banking companies/stock broking companies registered with Sebi, insurance company holding a valid certificate of registration issued by IRDA, Nidhi companies as notified under Section 620A of the Companies Act, 1956, chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982 or housing finance companies regulated by National Housing Bank.

What Are The Different Types Of NBFCs Registered With RBI ?

The NBFCs that are registered with RBI are:

(i) equipment leasing company;

(ii) hire-purchase company;

(iii) loan company;

(iv) investment company.

What Do Nbfc’s Broadly Check In Your Cibil Report?

1.CIBIL Score and Report: It is one of the most important factor that affects your loan approval. A good credit score and report is a positive indicator of your credit health.In India, there are 4 credit bureaus providing credit scores for the individual customer segment – CIBIL, CRIF, Experian, and Equifax. Your credit score is usually a three-digit number ranging from 300 to 900 that plays a critical role in the loan and credit card approval process, and is calculated basis your financial history. Higher your score, higher are your chances of getting a loan approval.

To help you know your credit score, most lenders provide services to get a free of cost credit report through one of the bureau they might have a tie-up with. Once you know your score, you can evaluate your creditworthiness and improve the score by ensuring timely repayment of all the outstanding dues like credit card bills, loan EMIs, utility bills, among others.

  1. Employment Status:Apart from a good credit history, lenders also check for your steady income and employment status. Your employment status and earnings are one of the most significant factors that lenders look at to gauge your financial strength. 

    If you have a stable job, you enjoy higher chances of securing a loan as compared to someone making frequent job changes because employment stability acts as a critical factor in judging your creditworthiness. While your employment status tells about your financial stability, your income level exhibits your repayment capacity. Most lenders have some minimum income criteria, which varies from lender to lender.

    There is a direct correlation between your monthly disposable income and the fresh loan amount you are eligible for. Traditionally, lenders consider 55-60% of your net monthly income as the surplus available for all loan repayments put together. Therefore, you should calculate your first loan EMI affordability basis your Monthly Surplus/ Disposable Income calculated as Monthly Net Income - Monthly Expenses - EMIs of ongoing loans. 
  2. Account Details:Settled or written off cases are carefully examined by lenders. When you are not able to make payments against the outstanding loan/credit card amount for more than 180 days, the lender is required to "write-off" the amount in question. The lender then proceeds to report this on your CIBIL Report as "Written off". This is a detrimental status for the approval of your loan or credit card applications as the lender may not want to provide a loan or credit card to someone who has not paid dues on past loans or credit cards.

  3. Payment History:Lenders check for any default on payments or amount overdue cases, which might project a negative overview of your overall report. A single missed payment can reduce your CIBIL score and thereby decrease your credit worthiness. Banks and other financial institutions might turn down loan requests while credit card companies which periodically review their customers’ profiles might reduce the credit limit on a card if the CIBIL score is low. Credit card issuers would like to ensure that your payment record is clean before they offer you higher credit limits.

NBFCs are Better than Banks: Here’s why?

NBFCs can just make investment or lend, they don’t accept demand deposits. But when it comes to borrowing loan most prefer NBFCs over banks and the reason for this is banks have hard rules and requires more time to approve or sanction a loan. On the other hand NBFCs ensures the processing is quicker and necessary loan amount is disbursed within days. Though rate of interest is high at NBFCs most of the times as compared to banks, borrowers still prefer to take loans from NBFC considering the ease of getting loan and less complication. However, if the question is around which type of borrowing and lending is safe, the best answer is “Banks”. These much more regulated, there are clear rules and regulations are places, lot of scrutinisation is done before approving a loan (thus less chance of defaults).

In order to summaries, the three main reasons why NBFCs are preferred over banks for loans are:

Competitive Interest Rates:

Rate of interest is one of the main aspects of all types of loans. Non-Banking Financial Sectors have started to concentrate on this area in the recent decades and have brought down the interest rates to either equally to bank lending rates or at times even lower to bank rates. With all the other benefits when rate of interest is also lowered, borrowers found this more easy and affordable. This has also resulted in lower EMI (Equated Monthly Installment) for borrowers. Based on the income, credit scoring ad repayment rate of interest is charged on the borrowers however it is at competitive rates.

Quick Processing:

At banks, it is very important that the applicant should fulfill the eligibility criteria but NBFC are lenient in this aspect. This makes loan approval easier, smoother process and quicker. Most of the times, people apply for loan when they are in immediate need of money. NBFCs have taken this as an opportunity to meet the demand by quickly processing the loans at competitive rate of interest. At times, borrowers are even ready to compromise on the interest rates if the loan amount is huge and if they could get it approved quickly.

Less Rules and Regulations:

As NBFC are under Companies Act, the rules and regulations for lending are not as stringent as banks. This helps borrowers to get loans easily. And the less complicated loan processing is; borrowers are highly satisfied. Of course, the risk of default is high with NBFC and thus interest rates and other charges will be according priced by the NBFC. Even the loan amount approved will be quite lesser than the collateral value. This is due to the high risk of default.

Loan available for Individuals with Poor Credit Rating:

Individuals with poor credit rating generally will not get loans from banks. The reason for this is banks consider borrowers are high-risk individuals if the credit scoring is low. Unless the credit score is above 600 -650, it is very difficult to get a loan sanctioned from banks. On the other hand, loans will be offered to individuals with low credit score by NBFCs but most of the time the interest rates for such borrowers will be higher than market rates. Due to these aforementioned advantages, most of the NBFCs are growing.

With regard to offering loans, banks and NBFCs will offer business, personal and retail loans. And this is totally on the basis of the repayment capacity of the borrower. Most of the corporate sector prefers banks however; retails sector chooses NBFCs over banks. Simple loans such are vehicle financing loans, gold loans, home loans and durable loans are offered by NBFCs. And customer satisfaction ratio is high here. NBFC sector is also set to expand even further in the coming days. If someone is looking to get a quick loan approved then the first option is NBFCs as banks are more stringent in approving loans.



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