The data indicates that individuals prefer NBFCs over banks for deposits. But what could be driving this trend?
Non-Banking Financial Companies (NBFCs) have witnessed robust growth in deposits surpassing the performance of banks in the financial year 2024 (FY24). According to data by RBI, NBFCs have increased their deposit base by 21 per cent in FY24, a significant contrast seen by banks at 13.5 per cent.
NBFC’s aggregate public deposits have been recorded at Rs 1.03 lakh crore as of March 2024-end, clocking a 20.8 per cent year-on-year jump as per RBI's Handbook of Statistics on Indian Economy. The data shows that NBFCs witnessed 20.8 per cent growth for the past two consecutive years in FY23 and FY24. On the other hand, banks witnessed deposit growth of 9.6 per cent in FY23.
The data indicates that individuals are preferring NBFCs over banks for deposits. But what could be driving this trend? NBFCs hook savers by offering attractive interest rates which are around 150 basis points higher than those provided by banks, as per a report by The Economic Times. Bajaj Finance, for instance, reported a 35 per cent year-on-year growth in deposits, amounting to Rs 60,151 crore, while Shriram Finance saw a 23 per cent increase to Rs 44,444 crore.
NBFCs such as Indiabulls Housing and Nido Home Finance (formerly Edelweiss Housing Finance) are further driving this trend by offering even more competitive rates, according to the ET report.
Interest rates for public deposits vary by bank/lenders and the type of deposit scheme. As of February 2024, some NBFCs offered interest rates on fixed deposits (FDs) ranging from 7.4 per cent to 8.6 per cent per annum as compared to the 6-7.25 per cent range offered by some banks.
Despite this growth, savers should know that NBFCs are often under the regulatory scrutiny of RBI. Recently, the Central Bank reduced the number of NBFCs allowed to accept public deposits from 34 to 25 in FY24, citing concerns about regulatory standards.
While NBFCs with at least a "BBB—" credit rating are allowed to accept deposits, they cannot offer demand deposits like current or savings accounts. RBI has put such tight regulations on NBFCs to maintain financial stability, as the regulatory framework for them remains more stringent as compared to banks.
NBFCs are doing functions similar to banks such as lending and making investments, however, there are a few differences such as:
1) NBFC cannot accept demand deposits;
2) NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself
3) The deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in the case of banks.