Borrowing in India: Banks vs NBFCs

Borrowing patterns in India have dramatically shifted in recent years, with Non-Banking Financial Companies (NBFCs) now playing a significant role alongside traditional banks. Understanding the statistics and the reasons for this trend is crucial for borrowers in small towns—especially as credit score awareness becomes key to reducing long-term borrowing costs.

Banks vs. NBFC: Borrowing Trends

• NBFCs’ share of new personal loans in India reached 41% by value as of mid-2025, up from 27% two years earlier, driven by faster loan disbursement and easier processes.

• The NBFC sector posted a 20% credit growth rate in FY25, compared to only 12% for banks.

• Total NBFC credit in India is projected to exceed ₹60 lakh crore by late 2025, reflecting significant growth in Tier-II and Tier-III cities.

• While banks remain dominant in urban lending, NBFCs excel in small towns and rural areas by providing easy access, less stringent documentation, and innovative digital lending platforms.

Why Small-Town Borrowers Prefer NBFCs

Many borrowers in small towns choose NBFCs for:

• Quick approval times, fewer documentation requirements, and a willingness to serve clients that banks may consider “risky” or “new-to-credit”.

• Loan products tailored to local entrepreneurs, MSMEs, and self-employed individuals who may not meet traditional bank criteria.

Why Shifting to Banks Makes Sense

• Although NBFCs are convenient, their interest rates are often significantly higher than those offered by banks—particularly for personal, vehicle, and home loans.

• As borrowers establish repayment history and build better credit scores, shifting to banks can mean:

  • Lower interest rates and reduced EMIs.

  • Larger loan amounts for future needs at more favorable terms.

The Role of Credit Scores in Interest Rates

• A high credit score (750 and above) is rewarded by both NBFCs and banks, but banks typically offer better deals for scores in this range.

• For example, a borrower with a score of 800 might receive a home loan at 8.1% interest, while someone with a 720 score might pay 8.85% for the same amount and tenure—resulting in savings of nearly ₹8 lakh over 25 years on a ₹50 lakh loan.

• Improving a credit score not only boosts loan eligibility but directly translates to tangible savings through lower interest rates, making it essential for borrowers to transition to mainstream banking once they have improved their credit profile.

Summary for Small-Town Borrowers

• NBFCs offer vital access to finance in underserved regions, but their loans are often more expensive over time.

• As credit awareness grows, borrowers should focus on improving their credit scores, gradually moving to banks for more competitive rates and long-term financial health.

• Maintaining a solid credit history, making timely repayments, and shifting to lower-cost bank loans when possible are keys to saving money and accessing better financial products in the future.