LoanRaja Blog- Personal Finance Guide

Competition in the high-yield personal loans market has increased with the entry of multinationals, private banks and Non-Banking Financial Companies (NBFCs). While banks have the advantage of low cost of capital NBFCs are free from many capital related requirements. They compete with banks in easy and fast appraisal and disbursements of loans. A present day borrower looks for more convenience, quick appraisal and decision-making, higher amount of loan and longer tenure. Banks may not offer the flexibility that a personal loan seeker expects.

This is where NBFCs are at an advantage. While they can’t compete with banks on lower interest rates NBFCs are competing very clearly on the service aspects by coming out with new products which offer larger flexibility to the client. Through innovative ways they are penetrating semi-urban and rural centres with limited reach of banks. In urban areas, NBFCs focus on segments usually neglected by banks like non-salaried individuals, traders, transporters, stock brokers, etc. But they have a higher rate of sticky loans.

Rising credit demand

India has a huge market for unsecured credit. Banks alone won’t be in a position to meet the growing demand. Although NBFCs are no replacement for banks they are snatching business from banks in personal loans, mortgage, insurance, car loans, AMC, MF distribution, insurance advisory etc. NBFCs are present where the risk is higher and chances of returns are higher. After facing stiff competition from banks in their traditional business of retail financing they have diversified to tap the opportunities thrown up by a fast growing economy. NBFCs know that the younger generation dreams big and is not averse to borrowing for an improved lifestyle.

Nationalized banks, private sector banks and multinational banks all offer personal loans. It meets a customer’s urgent need for cash and the lender is not bothered about the purpose of the loan. Eligibility norms, documentation and income criteria vary from bank to bank. So are the interest rates and other charges. Interest rate ranges from 12 to 30 per cent with a maximum tenure of 60 months. Customer’s advantage in taking a personal loan from a bank is that it will have well-established procedures and clear-cut norms on eligibility, income calculation and repayment. The cheapest personal loan is available at nationalized banks. The flip side is that processing may take more time than you have bargained for.

NBFCs’ strength

The core strengths of NBFCs lie in their strong customer relationships, good understanding of regional dynamics, service orientation, and ability to reach out to customers who would otherwise have been ignored by banks. Some of the leading NBFC players in the personal loan segment are CitiFinancial Consumer Finance India Ltd.,GE Money, Countrywide Finance and Cholamandalam DBS. Different NBFCs have different rates of interests and other charges. At the time of writing Countrywide Finance offers personal loans at 27 percent interest and 2 pc processing fee with 2 pc prepayment charge. CitiFinancial charges 22 per cent interest and 2 per cent processing fee with 4 percent prepayment charge. Though some players like Citi Financial and Fullerton go through a personal screening of customers, not everyone follows this practice.

In their bid to make a fast buck, NBFCs often hawk expensive loans to low-income groups, without seeking adequate income proof. Two successive defaults would bring the ‘unfriendly’ recovery agent to a customer’s doorstep. NBFCs are not as transparent as nationalized banks on the actual cost of personal loan. Borrowers at the time of sanction of loans may not be fully aware of the terms and conditions of the loans including rate of interest either because the NBFC does not provide details of the same or the borrower has no time look into detailed agreement. RBI directive last year to give a copy of the loan agreement to the borrower listing all the charges may improve the situation.

Comparative rates

Following is an example of how a public sector bank and an NBFC treat the same amount of personal loan with the same tenure. The amount of personal loan is Rs.25,000 with a two-year tenure:

Note: These rates may have changed, please check current rates at the time of applying

SBI Saral Personal Loan:
Interest rate : 14.5%
EMI : Rs.1,206
Processing fee : 1-2%
Prepayment fee : Nil after 6 months
Total interest : Rs.3,950.

Citi Financials Personal Loan::
Interest rate : 22 %
EMI : Rs.1,297
Processing fee : 2%
Prepayment fee : 4%
Total interest : Rs.6,127.