In India, many consumers and small businesses transact with non-bank financial companies (NBFCs) such as Tata Capital, Bajaj Finance, Shriram Finance for taking loans and making deposits (in limited cases). This article weighs the merits and demertis of NBFCs compared to formal banks, in terms of both taking loans or placing deposits.
What are NBFCs & what is their legal status?
NBFCs are financial institutions registered under the Companies Act and regulated by RBI, though they differ from banks in certain respects.
- Importantly, not all NBFCs are allowed to accept public deposits. Only those holding a Certificate of Registration (CoR) for Deposit Acceptance and have a minimum investment grade credit rating of ‘BBB–' may do so, as per RBI guidelines.
- Critically, deposits made by customers in NBFCs are not insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) in the way bank deposits are.
Taking loans from NBFCs
Pros | Cons |
| Faster processing & simpler documentation, since NBFCs often have leaner procedures and quicker approvals. | Because NBFCs carry higher risk and less regulatory buffer, their interest rates and processing charges are often higher. |
| NBFCs can offer greater flexibility, custom products (e.g. consumer loans) or small ticket lending that banks might not offer. | While banks are tightly regulated under the Banking Regulation Act; NBFCs operate under lighter regulation. |
| Underserved borrowers who don’t meet strict bank criteria may find NBFCs more willing to lend to them. | As NBFCs rely on wholesale funding and market borrowings, in stressful times they might face liquidity constraints. |
| In consumer & SME loan segments, NBFCs sometimes offer competitive interest rates compared to banks. | If the NBFC is weakened or mismanages, the chance of default is higher. The RBI has warned against NBFCs' “growth-at-any-cost” strategies. |
Depositing with NBFCs
Pros | Cons |
| NBFCs that are allowed accept deposits may offer higher interest rates than banks to attract funds. | No deposit insurance coverage as your capital is not protected under DICGC. In case of an NBFC's bankruptcy or default, depositors are treated as unsecured creditors and may get nothing back. |
| They may give flexible tenure options (within allowed limits) to depositors compared to banks. | NBFCs can accept deposits only for periods between 12 to 60 months and cannot accept demand deposits. They are also limited in to accepting deposits up to 1.5 times their net owned funds. |
In contrast, banks offer run-on demand deposits, full deposit insurance (up to limits), broad liquidity, and stronger systemic backing.
Comparison to formal banks
| NBFCs | Formal Banks | |
| Loan processing | Faster, leaner procedures | Slower, more checks |
| Interest rate on loans | Often higher | Generally lower |
| Deposit insurance | None | Insured by DICGC up to limit |
| Regulatory oversight by RBI | Lighter | Strong, under Banking Act |
| Liquidity & stability | Higher risk in stress | Stronger buffer, central support |
| Deposit access | Only fixed term (if allowed) | Demand + term deposits |
| Product breadth | Niche / specialized | Wide range including payments, current accounts, etc. |
Caution for Borrowers and Depositors
- If you are a borrower needing quick access to funds, an NBFC may make sense compared to an unregulated moneylender — but be ready to pay higher interests.
- If you are depositing funds,
- Verify that an NBFC is authorized for deposit acceptance against the RBI CoR list.
- Always check the financial health of the firm despite attractive interest rates.
- Compare interest, tenure, default history, regulatory standing, and your need for liquidity before deciding.
- Banks are always safer due to deposit insurance and stronger regulation.
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