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Shadow Banking In India Research Team | Posted On Saturday, March 16,2019, 01:19 PM

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Shadow Banking In India



What is Shadow Banking?

Shadow Banking is the services provided by Non Banking Financial Companies or NBFCs similar to traditional commercial Banks. Shadow Banking in India has really taken off in the last few years. India’s shadow banking sector consists of more than 11,400 firms with a combined balance sheet exceeding Rs 22 Trillion ($304 Billion). The loan books of NBFCs have grown at twice the speed of banks.

Does the word shadow banking seem tough to understand? It’s simple. They are NBFCs like IL&FS, Bajaj Finance and the Housing Finance Companies like LIC Housing Finance, HDFC, PNB Housing Finance, DHFL, ICICI Home Finance Company among others.

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SEE ALSO:  What is Shadow Banking?

Shadow Banking In India

Why Avail loans from NBFCs?

Take a look at this? NBFCs charge higher interest rates than banks. Still, customers flock to these NBFCs for loans. The main reason is NBFCs are not as rigid as banks.

NBFCs may charge 2% higher interest than banks, but they understand the customer. They understand the local economics and the local dynamics. They are in touch with ground reality.

NBFCs understand what the customer wants and help him get it.

NBFCs are not as rigid as banks. They lend money to borrower’s who don’t have bank accounts, no credit history or even tangible assets. If you want to buy a rickshaw or set up a small hotel, avail loans from NBFCs.

NBFCs which are financially strong like LIC Housing Finance, Bajaj Finance, HDFC Ltd are getting a lot of customers.

Home Loan: Bank vs NBFC

This is a dilemma many Indians face. Should you avail a home loan from a bank or an NBFC?

1. Interest Rates:

Banks base home loan interest rates on MCLR or the Marginal Cost of funds based Lending Rate closely monitored by the RBI. MCLR is calculated based on marginal cost of funds, tenor premium, operating expenses and cash reserve ratio or CRR. MCLR is an internal reference for banks to decide home loan interest rates. Under MCLR, banks can adjust interest rates when repo rates change. Current Repo Rate is 6.25%. Banks cannot lend at rates below MCLR.

The loans sanctioned by HFCs (Housing Finance Companies) and NBFCs are linked to Prime Lending Rate or PLR.  This is interest rate charged to the largest, most secure, credit worthy customers. NBFCs and HFCs are free to set PLR. NBFCs increase loan rates as per requirements. Customers who cannot meet the strict bank eligibility norms opt for NBFCs at higher interest rates. If you meet bank eligibility criteria, avail home loan from banks.

2. Credit Score:

Both banks and NBFCs look at credit scores carefully. Banks don’t sanction home loans if you have bad credit score. has a tie-up with Experian. Check free credit score with

NBFCs have more relaxed rules vis-à-vis credit score. Both banks and NBFCs charge higher interest rates on home loans for customers with poor credit score.

3. Loan amount:

Banks fund up to 80-90% of your property costs. If you are buying a property worth Rs 50 Lakhs, you get home loan of Rs 40-45 Lakhs.

Both banks and NBFCs do not fund stamp duty and registration fees. NBFCS may include these costs in property market valuation and help you borrow a larger amount as per eligibility.

4. Pre-payment and late payment fees:

Both banks and NBFCs have pre-payment and foreclosure charges. Unfortunately, NBFC pre-payment and late payments fees are higher than banks. Late payment charges at NBFCs may be 10-20% of monthly EMIs. NBFCs may have higher processing fees.

Education Loan: Bank vs NBFC

Both banks and NBFCs offer education loans. Banks sanction loans to students who get admission in top educational institutions. Banks also sanction loans to students to study abroad. Banks like SBI, Kotak Mahindra Bank, Bank of Baroda, HDFC Bank, Union Bank of India sanction education loans.

You can also avail an education loan from NBFCs. NBFCs like Avanse, Tata Capital and HDFC Credila sanction education loans.

Many students are opting for education loans from NBFCs. This is because they sanction education loans for unconventional / vocational courses like data sciences, photography, music, sports engineering, animation, painting, theatre, dance and language.

Restriction on Expenses:

Banks and NBFCs fund college fees, caution deposit, purchase of books, building fund deposit, purchase of laptops and so on. However, banks have restrictions like lodging and boarding charges if students opt for outside accommodation or management quota fees. Banks cap expenses like purchase of books, laptops, study tours which may be capped at 20% of total tuition fees payable for completion of the course.

Interest Rates:

Bank education loans are linked to MCLR. NBFCs set their own rates for education loan based on cost of funds and competition.

Bank education loans are floating interest rate loans. Interest rates on education loans are MCLR + 1.5-2%. Education loans are around 9-12% a year.

NBFCs have lending rate on education loan around 11-13% a year depending on candidate’s profile, eligibility and other criteria.

Banks sanctions collateral free education loans up to Rs 4 Lakhs. Some banks even sanction collateral free education loans up to Rs 7.5 Lakhs. Some banks have 100% funding for higher education. NBFCs have no margin requirements and fund up to 100%.

SEE ALSO:  Education Loan

Income Proof of Parents:

Banks sanction education loans on joint borrower basis. The joint borrower is the parent or guardian. For married people its spouse/parents/parents-in-law.

NBFCs too sanction education loans on joint borrower basis as one of the criteria. NBFCs have strict criteria when it comes to student’s employability. This is the student’s employability/job prospects after completion of the course. NBFCs take a look at your academic performance and GRE scores in case of foreign education.

Avanse follows the employment predictability model before sanctioning education loans. This model helps estimate future income of the student. It checks entrance test score, academics which are undergraduate results, work experience if applicable, Course and University where you are studying (secured admission). Avanse matches this data with employment history data of the university and the course/program.

Repayment of Education Loan:

Banks and NBFCs offer multiple repayment options on education loans. You have an EMI holiday till the course ends or the step-up EMI facility. Education loan EMIs increase with time.

You can opt for education loans from NBFCs for quick loan disbursal or unconventional course. NBFCs may not have a cap on expenses and lesser restrictions.

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