Banks vs NBFIs in Bangladesh: A Comparative Analysis

The concept of banking (accepting deposits, lending money and fixing an interest rate) goes back to the metal ages back in the 6th century BC when metal coinage was developed. But since then the concept of banking evolved as different civilizations adopted the idea. And with the industrial revolution, different financial intermediaries including non-banking financial institutions or NBFIs emerged to mitigate the limitations of the banking sectors. But with different parameters. While both can facilitate their consumers with similar types of services such as investment, risk pooling, contractual savings, loan facilities, and market brokering, their methodologies can be different. However, in this article, we will focus only on how these financial intermediaries handle the process of home loans and other things associated with them. Here is a comparative analysis of Banks vs NBFIs in Bangladesh.

Similarities and differences between banks and NBFIs

Before we dive into discussing banks vs NBFIs in Bangladesh and how they handle the issue of home loans, it is important to understand the similarities and differences between them and how they function. This will give you a clear understanding of why certain things are handled differently in those governing bodies.

Similarities

• Both banks and NBFIs acquire the primary securities (the things that are being financed) and in turn offer their demand deposits (a sum of money that can be withdrawn without any prior notice) to borrowers.
• Commercial banks and NBFIs both borrow but from different sources in order to create demand deposits and indirect debts respectively. NBFIs don’t create demand deposits like a bank. Instead, they create different forms of indirect debt when they borrow from commercial banks. On the other hand, commercial banks borrow from central bank.
• Banks and NBFIs work as intermediaries between borrowers and lenders for the purpose of earning profits.
• They both provide liquid funds.

Differences

• In simpler terms, commercial banks can generate money by directly issuing their liabilities to acquire other assets. NBFIs, on the other hand, can’t generate money because of government regulations. They can only create liquidity.
• Both are totally different in regards to cash reserve requirements. All commercial banks are required to maintain a minimum cash reserve. Also, they are legally bound to maintain a minimum cash reserve ratio whereas NBFIs do not have such requirements or restrictions.
• When it comes to taking risks, NBFIs can take a greater risk as they generally do not enter into the detailed evaluation of projects and follow less stringent regulations for granting loans. The same can’t be said for commercial banks.
• NBFIs cannot accept demand deposits, they can only make investments and give loans.

Banks vs NBFIs in Bangladesh: How they process home loans

In this section, we will discuss how these two financial intermediaries process home loans. As we mentioned earlier, both banks and NBFIs have different frameworks. That is to say, their methodologies and criteria also differ quite a lot. That said here are defining factors of choosing one over the other.

Interest rate

The interest rate is one of the biggest determinant factors when it comes to taking a home loan. And since all commercial banks are obligated to offer a maximum interest rate on home loans of 9%, currently commercial banks offer a much lower interest rate than NBFIs. Although NBFIs are also bringing down their interest rates, it is hard to ignore the big difference between them.

For example, if you want to take a loan from Delta Brac Housing Finance Corporation Ltd. (DBH), currently the minimum interest rate that they offer is 9.99% but is exclusive to clients of Bproperty, which is 0.99% higher than the single-digit interest rate of commercial banks.

Processing time

Processing time is really important and another crucial factor when it comes to home loans. Many people walk out from banks without taking a home loan because of their long and complicated process. Banks have to follow certain rules and regulations during advancing a loan which can cause a long delay when sanctioning a loan. Generally, this is due to the detailed appraisal of the projects.

NBFIs, on the other hand, have to follow less stringent rules. Also, most NBFIs do not do detailed project evaluations. So the processing time of granting a loan from an NBFI is substantially faster than that of banks.

Rules and regulations

As we mentioned, all commercial banks are bound to strict guidelines from the central bank at the time of advancing home loans. When considering a home loan, there are other important aspects and conditions that you must meet in order to avail a home loan from a bank. For example, your monthly income, age, and work experience are crucial factors.

But most of these regulations are flexible or can be reduced in most NBFIs. Compared to commercial banks, NBFIs have less stringent rules and regulations. That is why they have more flexibility in customizing various loan schemes.

Loan ceiling

Speaking of flexibility, NBFIs are far more flexible than banks when it comes to the loan ceiling. All commercial banks of Bangladesh are limited by the debt-to-equity ratio of 70:30, whereas NBFIs are not. That is why NBFIs can offer a much higher loan ceiling than any commercial banks which can go up to 90%.

As you can see, most banks and NBFIs can offer the same thing but with different parameters. Sometimes it is better to take a loan from a bank if you want to pay less and long processing time isn’t an issue for you. But if time is your concern, then an NBFI might be better suited to your needs.

We tried to give a comparative analysis of Banks vs NBFIs in Bangladesh in terms of home loans, similarities and differences, and the overall processes. Do let us know your thoughts in the comments section below.